Worst of inflation may be behind us, RBI staff say in July 2022 Bulletin

The pace of rise in prices in India is on the back foot and the “worst of inflation may be behind us”, Reserve Bank of India (RBI) staff wrote in the July 2022 edition of the central bank’s Bulletin.

“For the second month in a row in June, headline CPI inflation eased in India, according to the July 12, 2022 data release of the National Statistics Office (NSO), on the back of receding food inflation. Very grudgingly, as we foretold, but diverging from the global central tendency… Several global developments are pointing in that direction,” RBI staff wrote in the State of the Economy article of the July Bulletin.

The article, which counts RBI deputy governor Michael Patra among its authors, does not necessarily represent the views of RBI.

Inflation, as measured by the consumer price index (CPI), eased to 7.01 per cent in June from 7.04 per cent a month ago, the NSO data showed. The June data marked sixth consecutive month that CPI inflation was above the upper bound of the RBI’s target range of 2-6 per cent.

Retail inflation has remained above 6 per cent since January 2022. The RBI’s Monetary Policy Committee (MPC) has raised the benchmark policy repo rate by a total of 90 basis points to 4.90 per cent since May.

Among the global developments which point towards easing inflationary pressures are the aggressive monetary policy tightening plans announced by central banks across the globe, softening commodity prices and reduction in supply chain constraints, the article stated.

“Prices of goods, which were caught up in supply chain tangles are approaching a tipping point,” the article read.

It pointed out that retailers with built-up inventories were reducing prices to shift stock and both input and output in the global manufacturing purchasing managers’ index had eased in June.

Such positive developments could appear in India too, the RBI staff wrote, adding that the formation of a trend in falling international commodity prices could encourage food companies to start cutting prices.

From a 14-year high of $140 per barrel in March, prices of Brent crude have cooled off significantly, with the most active futures contract currently hovering near the $100-per-barrel mark.

Global crude oil prices had surged following Russia’s invasion of Ukraine in February. The development posed substantial upside risks to India’s inflation and current account deficit, given that the country imports more than 80 per cent of its fuel needs.

According to the article in the RBI’s July Bulletin, suppliers’ delivery time turned positive for the first time since February 2021, reflecting an easing of supply chain constraints for India.

“Most importantly, monetary policy has gone on to the front foot against inflation and as Governor Shri Shaktikanta Das pointed out: …..our current assessment is that inflation may ease gradually in the second half of 2022-23, precluding the chances of a hard landing in India”.

In its June policy statement, the MPC forecast CPI inflation at 6.2 per cent in October-December and 5.8 per cent in January-March. For the current financial year, CPI inflation is projected at 6.7 per cent.

The article said that the recent measures by the RBI to further liberalize foreign exchange flows are expected to enhance foreign currency flows while ensuring overall macro-economic and financial stability.

Since the Ukraine war broke out in late February, the RBI has heavily sold dollars in the foreign exchange market to shield the rupee from runaway depreciation amid large outflows of overseas investment. The headline reserves were at $631.53 billion as of February 25. Latest data showed that the reserves were at $580.3 billion as of July 8.

According to the July Bulletin article, the current level of reserves were equivalent to 9.5 months of imports projected for 2022-23.