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RBI measures controlled inflation, but challenges remain

Economists are of the view that the measures taken by the Reserve Bank of India (RBI) have controlled inflation and add that inflation will come down.

A senior economist also said the headline inflation could be 7.5 percent in December putting a spanner in the inflation projections of the central bank.

The RBI’s Monetary Policy Committee (MPC) will meet on November 3 to discuss what it would tell the Centre as to why it was not able to restrain the inflation within four percent + or – two percent for three consecutive quarters.

The RBI may also sound out to the Central government as to the course of inflation as well as the reasons why it may be at elevated levels.

India’s central bank has been trying to contain inflation by increasing the repo rate — the rate at which it lends to the banks.

The central bank has increased the repo rate by 190 basis points in recent times and the last one was by 50 basis points.

In India, retail inflation rose to 7.41 percent in September.

“The measures taken by the government and RBI have been able to control inflation from the high of 7.8 percent we had seen in April. The fall in global commodity prices has also been supported in containing inflation. Inflationary expectations have also come down,” Rajani Sinha, Chief Economist, CARE Ratings Ltd told Media.

“However, the concern is the stickiness of core inflation above six percent and the renewed surge in domestic food inflation in the last few months. The measures taken by RBI to control inflation will show further impact with a lag of a few quarters,” she added.

“There is a strong case for the RBI arguing that (a) inflation has primarily been caused by supply-side shocks with global commodity prices having an impact (b) rupee depreciation has added to imported inflation (c) the RBI on its part was proactive in raising rates even between two policies as it did in May when it saw things were going out of hand post-Ukraine war and (d) there have been some measures like increase in goods and services tax (GST) which has added to inflation that was happening in parallel,” Madan Sabnavis, Chief Economist, Bank of Baroda, told Media.

“Therefore, there is an explanation as to why inflation was high. But the central bank has been acting to bring it down through the instruments it has like repo and CRR (cash reserve ratio). It has succeeded in lowering surplus liquidity too which can be proved,” Sabnavis added.

“There was a huge sale of forex almost Rs 3 lakh crore to maintain the exchange rate. Inflation which was more than the target continuously for three quarters is estimated to come to around 6 percent by three more quarters. Interest rates (repo rate) have been increased by almost 1.9 percent. As such the MPC may only be constrained to say that the present steps taken need some more time for having a positive impact to reduce inflation. This is subject to the time inconsistency impact,” K. Ramasubramanian, retired General Manager, RBI, and a forex advisor told IANS.

According to Sinha, the CPI inflation is estimated to inch below seven percent in the next few months due to the base effect and below six percent by the end of the fiscal year.

Looking ahead, Sinha said the RBI could hike the repo rate further by 25-50 bps in the current fiscal year.

“As we approach closer to the neutral policy rate, RBI will get more cautious in its rate decision,” she added.

Citing the unseasonal rain affecting the Kharif crops and the September food inflation at 8.4 percent Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India said in 2019 when such rains happened, the average food prices more than doubled from 4.9 percent to 10.9 percent.

Similarly, the headline inflation in December could be 7.5 percent and could put a spanner to the inflation projections of RBI and market consensus, Ghosh said in a research report.

“This could also mean that the terminal repo rate could still be difficult to comprehend at this time, though consensus puts it at 6.5 percent,” Ghosh said.

According to Sinha, the US Federal Reserve’s policy decisions and the consequences on the currency market will also have a bearing on RBI’s future policy decisions.

Economists said the MPC will not be deciding on the policy rate at their November 3 meeting.

“With global commodity prices falling and the likely support of base effect in containing India’s CPI inflation in the next few months, RBI is unlikely to be in a tearing hurry,” Sinha added.

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