According to an RBI article, high inflation necessitates appropriate policy responses

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According to an RBI article published on Thursday, inflation is persistently high, necessitating appropriate policy responses to anchor expectations in the future.

Retail inflation based on the consumer price index (CPI) fell to 6.71 percent in July, owing primarily to lower food prices.

RBI raised Repo rate by 140 pts

The Reserve Bank raised the benchmark lending rate (repo) by 140 basis points three times in a row to tame inflation, which has remained above its tolerance level for the seventh month in a row.

“…perhaps the most encouraging recent development has been the reduction in inflation in July 2022 by 30 basis points from June 2022 and an appreciable 60 basis points from the average of 7.3% for Q1:2022-23.

This has validated our hypothesis that inflation will peak in April 2022,” according to the’state of the economy’ article.

RBI forecasts a steady easing of the momentum of price changes for the rest of the year

The RBI forecasts a steady easing of the momentum of price changes for the rest of the year.

A team led by Reserve Bank Deputy Governor Michael Debabrata Patra wrote the article. The Reserve Bank of India stated that the views expressed in the article are those of the authors and do not necessarily represent the views of the RBI (Reserve Bank of India).

“With the trajectory of outcomes largely in line with projections, we expect momentum to ease from 3.0 percent in Q1 to 1.7 percent in Q2, and further to 1.3 percent in Q3, before turning mildly negative in Q4 before picking up modestly and on seasonal food price effects to 2.2 percent in Q1: 2023-24,” the article states.

If these forecasts are correct, inflation will fall from 7% to 5% in the first quarter of the next fiscal year, remaining within the tolerance band and hovering closer to the target but not yet ready to land, according to the authors.

The overarching risk remains imported inflation pressure points, followed by pending pass-through of input costs if producers regain pricing power and wages.

However, some risks have decreased: commodity prices, particularly crude; supply chain pressures; and a pick-up in monsoon activity due to the depression in the Bay of Bengal.

Inflation has dipped slightly

“Inflation has dipped slightly, but its persistence at elevated levels necessitates appropriate policy responses to anchor expectations going forward,” according to the article.

It went on to say that global growth prospects have deteriorated over the past month.

The recent drop in commodity prices and the easing of supply chain pressures are providing some relief from record high inflation.

With the recent monsoon pick-up, strong momentum in manufacturing, and a rebound in services, supply conditions in India are improving.

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