Steps taken by RBI, govt to cut duration of high inflation: FinMin report

The finance ministry on Thursday said measures taken by the RBI and government will squeeze the duration of high inflation fuelled by global factors.

Retail inflation has been trending above Reserve Bank's upper tolerance level of 6 per cent for the past three months.

"While inflation is expected to be elevated in 2022-23, mitigating action taken by the government and RBI may reduce its duration. Evidence on consumption patterns further suggests that inflation in India has a lesser impact on low-income strata than on high-income groups," the finance ministry's monthly economic review said.

RBI in an off-cycle announcement earlier this month hiked the key repo rate -- at which it lends short term money to banks -- by 0.40 per cent to 4.40 per cent to tame inflation. This was the first rate hike since August 2018 and the sharpest in 11 years.

 

Further, it said, since aggregate demand is recovering only gradually, the risk of sustained high inflation is low.

Seen over a longer time horizon, it said, inflation in India's economy has not been as much a challenge as is sensed from month-to-month changes.

CPI (Consumer Price Index)-based inflation during FY22 averaged 5.5 per cent, 50 basis points below the upper limit of the RBI monetary policy committee's inflation band, and lower than 6.2 per cent for FY21.

RBI had sharply raised its inflation projection for the current fiscal year to 5.7 per cent from the earlier forecast of 4.5 per cent due to geopolitical tensions.

Beginning May, most of the major central banks, including US Federal Reserve and Bank of England, also increased their benchmark rate to rein in soaring inflation.

Markets, as the rising bond yields show, have already priced in the increase in policy rates, including the ones expected later in the year, besides absorption of excess liquidity, it said.

Global growth watchers, as their slowing growth projections reflect, have also factored in monetary tightening the world over to calm down global inflation, it said.

The cost of restraining inflation-- the slowing down of the global growth-- is manifested in the April update of the World Economic Outlook (WEO) of the IMF that projects growth of global output to decline from 6.1 per cent in 2021 to 3.6 per cent in 2022 as well as 2023.

"Among major countries, the WEO projects India to be the fastest growing economy at 8.2 per cent in 2022-23. Lending credence to this projection, the fiscal year 2022-23 has begun with a strong growth in economic activity in April as seen in the robust performance of e-way bill generation, ETC toll collection, electricity consumption, PMI manufacturing and PMI services," it said.

Notwithstanding the presence of inflationary headwinds, the capex-driven fiscal path of the government, as laid down in budget 2022-23, will help the economy post a near 8 per cent growth in real GDP for the current year, it said.

With regard to forex reserve, it said, the reserve was at a comfortable level of USD 597.7 billion, providing an import cover of about 11 months for financing investment and consumption in the country.

The reserves have been steadily declining under pressure from outflow of foreign portfolio investments responding to monetary tightening by central banks in advanced economies, it said.

Notwithstanding the turbulence associated with monetary tightening in advanced economies, the ongoing geopolitical conflict, lockdowns in parts of China and the supply-side disruptions, India is relatively better-placed than most other nations to weather the storm and achieve steady growth during the current financial year, the report said.

Rising food and energy prices are a global phenomenon and even several advanced nations have higher inflation rates than India, it said, adding that the Reserve Bank of India has signalled its determination to combat inflation and that too will sustain macroeconomic stability and growth.