Inflation may have peaked in January: RBI deputy governor Michael Patra

Consumer price index (CPI)-based inflation — the main yardstick of the Reserve Bank of India (RBI) for policy making — is likely to have peaked in January this year. And, it will ease to the 4 per cent target by 2023, the central bank’s deputy governor Michael Patra said on Wednesday.

January’s retail inflation accelerated to a seven-month high of 6.01 per cent, mainly due to rising food and manufactured item prices. It just breached the upper tolerance band of the RBI. 

The six-member monetary policy committee of the RBI — that sets interest rate — has a target to maintain CPI inflation at 4 per cent, with a variation of 2 per cent on both sides.

Speaking at the Asia Economic Dialogue 2022, Patra said the level of inflation in India, which is measured year-on-year (YoY), is appearing elevated purely due to statistical base, though the momentum or month-on-month changes in inflation are negative.

“Our sense is that headline inflation has peaked in January, and from here on, it will ease down to the target of 4 per cent by the last quarter of 2023,” Patra said.

He added, “And, this has provided us the space to maintain policy rates low and persevere with an accommodative stance so that we can focus all energies on accelerating and broadening the recovery.”

The MPC has maintained the accommodative stance of the monetary policy in its February meeting, while keeping the key policy rate or the repo rate unchanged. 

Some of the analysts described the policy statements as super dovish — as reflected by the sharp fall in bond yields post the announcement of policy measures.

Patra argued that flexibility is embedded in the monetary policy as the central bank has a flexible inflation targeting framework. 

This allowed them to deal with a-once-in-a-century pandemic. RBI has been proactive in reducing interest rates since the start of the pandemic. The repo rate was reduced by 115 points on two occasions — earlier in the pandemic.

According to Patra, there are five key characteristics of the flexible inflation targeting framework — one a dual mandate, which is price stability, keeping in mind the objective of growth. Only price stability gets a numerical target.  

“Number two, an inflation target that is defined in averages rather than a point. Number three — achievement of the target over a period of time rather than continuously. Number four, a reasonably wide tolerance band of plus or minus 2 per cent to accommodate measurement issues, forecast errors and supply shocks, as well as black swan events like the pandemic. And five, failure being defined as three consecutive quarters of deviation rather than every deviation from the target,” he said.

Commenting on the monetary policies of global central banks, Patra said India will take a path, which will be different from the rest of the world.

“Team transitory seems to be getting bulldozed into a minority and pushed into a corner. Meanwhile, as an increasing number of central banks tighten monetary policy, or indicate intent to normalise, financial conditions are hardening globally, and markets are turning increasingly volatile. To my mind, this is the biggest risk to global recovery, and may even tip it into a premature recession,” he added.

Patra argued that since monetary policy operates with a lag, today's actions can at best be expected to impact inflation six to 12 months down the line.

“So, what will be the character of inflation six to 12 months ahead? Any projection available today shows inflation peaking in the middle of 2022 and easing thereafter,” he said, adding such actions could kill the recovery.