” Inflation will fall from 7 to 5 per cent in Q1 next financial year – within the tolerance band, hovering closer to the target, but not yet positioned for landing ” said the economists in an article titled “State of the Economy” published in RBI’s latest monthly bulletin published on Thursday. “After Q1: 2023-24, the task before the MPC would be to guide inflation to its target of 4 percent. This may prove to be more arduous than the loss of height into the tolerance band”. The views expressed in the article are those of the team of economists which also includes RBI deputy governor Michael Patra and do not necessarily represent the views of the Reserve Bank of India
The authors base their optimism on the fact that inflation eased in July 2022 by 30 basis points from June 2022 and an appreciable 60 basis points from the average of 7.3 percent for Q1:2022-23. ” This has validated our hypothesis that inflation peaked in April 2022″ they said. “For the rest of the year, the RBI’s projections scent a steady easing of the momentum of price changes”
Though inflation has edged down, its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward, the authors warn. Also, as inflation is expected to exceed the upper end of the target band for three consecutive quarters, the Reserve Bank will have to write a letter to the Parliament about the glide path to the target level of 4 per cent as per the provisions in amended RBI Act when flexible inflation targeting was adopted as a formal monetary policy goal in 2014.
To be sure, with inflation levels above the target band for over six months, the Reserve Bank has cumulatively raised the benchmark policy repo rate by 90 basis points ( one bps is 0.01 per cent) since may and is now at 5.4 per cent
Though economic activity was sluggish in July compared to June, the recovery in the Indian economy is expected to gain momentum going by the preliminary indicators like investment in capex and pick up in consumption demand. “Supply conditions are improving, with the recent monsoon pick-up, strong momentum in manufacturing and a rebound in services” the economists said ” The onset of festival season should boost consumer demand, including rural, also as sowing activity picks up. Robust central government capital outlays are supporting investment activity”.
Sales of fast-moving consumer goods (FMCG) recorded a sequential decline in July, reflecting a seasonal drag in the beverages segment. Sales are expected to strengthen going ahead, with the cooling of edible oil prices on a global price correction. The expected demand pickup in the upcoming festive season, good monsoons and higher earnings are all aiding rural consumption and increase in out-of-home activities is propelling urban consumption.