Inflation fight won’t be painless: RBI deputy governor Michael Patra

Retail inflation will likely get back to the mid-point of the Reserve Bank of India’s (RBI) medium-term target of 2-6% in two years, given the raft of measures initiated by the monetary and fiscal authorities, deputy governor Michael Patra said on Friday. He expressed optimism that the “required monetary policy actions in India will be more moderate than elsewhere in the world”. However, the fight against inflation is unlikely to be “painless”, Patra cautioned, indicating its adverse impact on the economy.

Responding to the comments, yields on 10-year government securities rose 5 basis points in intra-day trade before easing a tad to settle up marginally at 7.43% on Friday.

Commenting on the rupee depreciation, Patra said the central bank is intervening in the forex market to curb undue volatility and it won’t allow “disorderly, jerky movement” of the domestic currency. The rupee hit a fresh low of 78.33 against the greenback on Friday. He also stated that the depreciation in the rupee is among the lowest in the world. The local currency has shed more than 5% against the dollar this year, against over 7% for the Philippine peso and 8% for the South Korean won.

Addressing a PHDCCI event here, Patra said, “If the monsoon brings with it a more benign outlook on food prices, India would have tamed the inflation crisis even earlier (than two years).”

Retail inflation eased to 7.04% in May from a 95-month high of 7.79% in April, as price pressure across core and food products moderated, partly aided by a somewhat conducive base. It, however, still remained above the RBI’s comfort zone for a fifth straight month.

The inflation outlook is “tethered to the war in Ukraine”, he stressed, but indicated that the central bank won’t “sit on our hands and do nothing in a fatalistic acquiescence”.

Patra, however, stated that there were “indications that inflation may be peaking” in India. At the same time, he stuck to the latest assessment of the monetary policy committee that retail inflation could stay above the central bank’s target for the next three quarters.

“Without a doubt, the impact of geopolitical risks will cause a very grudging decline in inflation…but India would succeed in bending down the future trajectory of inflation, winning the war in spite of losing the battle,” Patra, who is the deputy governor in charge of monetary policy, said.

The central bank has already hiked the repo rate by 90 basis points since May and is widely expected to raise it further in August as it battles to control elevated inflation.

If real GDP growth averages between 6% and 7% in this fiscal and the next (the RBI’s latest GDP growth forecast for FY23 is 7.2%) , the recovery that is increasingly solidifying gets a fair chance of traction. “The RBI will have fulfilled its mandate of prioritising price stability while being mindful of growth,” the deputy governor said.

Though containing food and fuel prices was outside the RBI’s purview, it was important to control the second-round impact from elevated prices, Patra said.

It’s necessary to keep inflation below 6% (the upper band of the target), as elevated price pressures “unambiguously” hurt growth, he added, citing research done by the central bank.

Any failure on part of the RBI to rein in inflation within the mandated range for three consecutive quarters will warrant the RBI to write a letter to the government, explaining the reasons for the failure and prescribing possible remedial measures.