The Reserve Bank of India in its October Bulletin noted that India’s fight against ‘stubborn’ retail inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates and that it is fraught with uncertainties.
Retail inflation, which is measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI), rose to 7.4% in September, up from 7.0% in August. The headline inflation saw a rise owing to the sharp increase in CPI food inflation to 8.4% in September from 7.6% a month ago.
However, going forward RBI expects the headline inflation to ease from its September high, albeit stubbornly, on the back of easing momentum and favourable base effects.
“While the persistence of headline CPI inflation above the tolerance band for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focussed on realigning inflation with the target,” RBI said.
Input cost pressures increased in September 2022 across manufacturing and services, albeit at a slower pace, as reflected in the PMIs. Selling prices also edged up across manufacturing and services, with the services sector registering price increases higher than the long-term average, the central bank noted in its bulletin.
RBI expects the momentum of real GDP growth to shed the drag embedded in the NSO’s estimates for Q1FY23 and move into positive territory in the remaining quarters. “Although this may not be evident in year-on-year growth rates due to unfavourable base effects, q-o-q annualised rates will reflect the underlying recovery,” the bulletin reads.
The contact-intensive sectors, which took a hit during the Covid-19 pandemic, are expected to lead the rejuvenation. “Festival-related spending is already boosting consumption demand with positive externalities for other components of domestic demand,” RBI says.
“The underlying fundamentals of our economy and the buffers built over the years have stood us in good stead. We have taken a series of measures since April 2022 in the backdrop of geopolitical tensions, sanctions and supply chain disruptions,” RBI Governor Shaktikanta Das said in a statement.
“We will remain resolute and persevere in our efforts to ensure price stability as well as financial stability, while supporting growth. Our policy action today is part of our continued efforts in pursuit of these goals,” he added.
On the forex front, data shows that during 2022-23 (up to September 27), the US dollar appreciated by 16.1% against a basket of major currencies while the Indian Rupee depreciated by a lower order of 6.8% against the US dollar. “The INR’s relatively better performance is attributed to stronger macroeconomic fundamentals and buffers – India’s inflation is lower than the weighted average of its major trading partners,” RBI said in its bulletin.
India’s foreign exchange reserves at US$ 537.5 billion (as on September 23) are the fifth largest globally which, in conjunction with net forward purchases, provide insulation from external shocks and resilience, the central bank said.