Steps taken by RBI and govt to cut duration of high inflation: Finmin report


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CPI (Consumer Price Index) -based inflation averaged 5.5 percent in FY22, 50 basis points lower than the upper limit of the RBI Monetary Policy Committee’s inflation band.

The finance ministry on Thursday said the measures taken by the RBI and the government would curb the period of high fuel inflation due to global factors.

Retail inflation has been trending above the Reserve Bank’s high tolerance level of 6 percent for the past three months. “While inflation is expected to rise in 2022-23, easing measures taken by the government and the RBI may shorten its duration. Evidence of spending patterns further suggests that inflation in India has a lower impact on low-income levels than high-income groups.” The ministry said in a monthly economic review.

The RBI raised the key repo rate in an off-cycle announcement earlier this month – where it lends short-term money to banks – from 0.40 percent to 4.40 percent to control inflation. This was the first rate increase since August 2018 and the most intense in 11 years. Further, as overall demand is slowly recovering, the risk of sustainable high inflation is low. As seen on the long-term horizon, it says inflation in the Indian economy has not been as challenging as it seems from month-to-month changes.

CPI (Consumer Price Index) -based inflation averaged 5.5 percent for FY22, 50 basis points below the upper limit of the RBI Monetary Policy Committee’s inflation band and below 6.2 percent for FY21. Due to geopolitical tensions, the RBI has sharply raised its inflation forecast for the current fiscal year from 4.5 per cent to 5.7 per cent. In early May, most of the major central banks, including the US Federal Reserve and the Bank of England, also raised their benchmark rates to curb rising inflation.

Rising bond yields show that markets have already set a price target for growth at a policy rate, including excess liquidity absorption, as well as expected rates towards the end of the year, it said. Global growth observers, as they reflect their slower growth projections, also have reason to tighten global monetary policy to calm global inflation, it said. Costs of controlling inflation – slowing global growth – The IMF’s World Economic Outlook (WEO) update in April revealed that global manufacturing growth could slow to 3.6 percent in 2021 from 6.1 percent. In 2022 as well as in 2023.

“Among the major countries, the WEO will make India a fast-growing economy at 8.2 per cent in 2022-23 – strong performance of e-way bill generation, ETC toll collection, power consumption, PMI generation and PMI services,” it said. The government’s capex-driven fiscal path, set in the 2022-23 budget, will help the economy grow by about 8 percent of real GDP for the current year, it said.

In terms of foreign exchange reserves, it said, the reserves were at a comfortable level of 7 597.7 billion, providing about 11 months of import cover to finance investment and spending in the country. Reserves continue to decline under the pressure of outflows of foreign portfolio investments, in response to the central bank’s financial austerity in developed economies.

Despite the turmoil in a developed economy due to financial stability, ongoing geopolitical conflicts, lockdowns and supply-side disruptions in some parts of China, India is in a relatively good position compared to other countries to cope with storms and achieve steady growth in the current financial year. Year, the report said. Rising food and energy prices are a global phenomenon and even the inflation rates of several developed countries are higher than India’s, he said, adding that the RBI has indicated its determination to tackle inflation and maintain macroeconomic stability and growth.

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