RBI claims worst of inflation in India may be over


Reserve Bank of India’s July bulletin has claimed that the “worst of inflation” may be behind India. The July bulletin of RBI has stated: “India’s inflation is on the back foot.

For the second month in a row in June, headline CPI inflation eased in India, according to the July 12, 2022 data release of the National Statistics Office (NSO), on the back of receding food inflation… the worst of inflation may be behind us. Several global developments are pointing in that direction.”

Political developments in the country however beg to differ from the bullish picture being projected by the central bank. Congress has included price rise as one of the priorities of its agenda prior to the monsoon session of the Parliament that starts on July 18. Senior party leader Mallikarjun Kharge said, after Congress held a meeting to discuss the agenda for the monsoon session, that the party has decided to prioritize price rise and spike in LPG prices during the monsoon session as these issues affect the common people.

The bulletin, however, points towards a resilient Indian economy. “The Indian economy is showing resilience and dynamism in spite of the geopolitical situation and high risk aversion in financial markets that is stampeding portfolio investors and taking down  all currencies against the unrelenting strength of the US dollar. Apparently, markets are differentiating between currencies on the basis of the size and speed of monetary policy tightening relative to the US Fed. In comparison with peers, the depreciation of the INR has been modest at 5.1 per cent on a financial year basis and 7.0 per cent on a calendar year basis to date,” the bulletin added.

The RBI, however, has also got a disclaimer accompanying its July bulletin: “This article has been prepared by GV Nadhanael, Madhuresh Kumar, Kunal Priyadarshi, Rajeev Jain, Harshita Keshan, Rigzen Yangdol, Palak Godara, Jobin Sebastian, Rohan Bansal, Priyanka Sachdeva, Avnish Kumar, Vijaya Agarwal, Akshara Awasthi, Deepika Rawat, Rajas Saroy, Ramesh Kumar Gupta, Ipsita Padhi, Aayushi Khandelwal, Sudhanshu Goyal, Harendra Behera, Pankaj Kumar, Kaustubh, Vineet Kumar Srivastava, Samir Ranjan Behera, Deba Prasad Rath and Michael Debabrata Patra. Views expressed in this article are those of the authors and do not necessarily represent the views of the Reserve Bank of India.” Patra is a deputy governor of RBI.

The bulletin proceeds to list out the “global developments” that point towards receding inflation: “First, central banks across the world are engaged in the most aggressive monetary policy tightening in decades so much so that financial markets wilt in the fear of imminent recession. Second, commodity prices are easing across the board, with even announcements of a big stimulus failing to halt their meltdown.”

“Third, supply chain pressures are edging down globally and in India. Prices of goods, which were caught up in supply chain tangles are approaching a tipping point. Fourth, retailers that had built inventories are cutting prices to shift stock. Fifth, both input and output in the global manufacturing purchasing managers’ index (PMI) moderated in June.”

In India too, says the bulletin, such positive developments may gradually appear. Formation of falling international commodity prices into a trend may encourage food manufacturing companies to stop  ‘shrinkflating’ and start reducing prices. Manufacturing and services input and output prices moderated in June, the former down to a 3-month low.

The bulletin quotes RBI governor Shaktikanta Das: Most importantly, monetary policy has gone on to the front foot against inflation and as governor Shri Shaktikanta Das pointed out: “…..our current assessment is that inflation may ease gradually in the second half of 2022-23, precluding the chances of a hard landing in India”.

“Amidst growing apprehensions of recession, the global manufacturing PMI fell in June 2022 to a 22-month low as new orders moderated and international flows declined. Reflecting ongoing improvement in demand, however, the global services PMI accelerated to its highest level since April 2011 and saved the blushes,” the July bulletin stated.

Meanwhile, reshoring of supply chain has begun. Businesses are shifting to dual sourcing, long term contracts, and vertical integration of production processes to gain strategic control. Foreign direct investment (FDI) is transforming, with more of reinvestment from local subsidiaries and less of capital invested by parents from across borders. More than 100 countries accounting for 90 percent of global GDP are pursuing ‘make at home’ policies which include strategic control over technologies and key inputs.

While acknowledging that the short-term global economic prospects may seem shrouded in “high uncertainty” owing to the “synchronized monetary trightening and the war in Europe”, RBI’s July bulletin points towards a “sliver of hope” in the recent moderation in global commodity prices, especially food prices. “This suggests that unjust inflation may be peaking, providing a breather for beleaguered nations across the world but is it presaging inexpedient recession?”

“The Indian economy remains resilient in the face of formidable global headwinds. Knock-on effects of geopolitical spillovers are visible in several sectors, tapering the pace of recovery. In spite of this overwhelming shock, there are sparks in the wind that ignite the innate strength of the economy and set it on course to becoming the fastest growing economy in the world, though besieged it might be by fears of recession,” the bulletin states.

“The recent revival of the southwest monsoon and rejuvenation of sowing activity has raised hopes of another bountiful year for agricultural activity, raising expectations that rural demand will soon catch up with urban spending and consolidate the recovery.”

“The biggest source of relief is from inflation coming off its recent peak, albeit at an elevated level still. Nonetheless, the signs of its generalization and the potential unhinging of inflation expectations have elicited a pre-emptive and frontloaded monetary policy response. Amidst all these developments, India’s financial sector remains sound and stable,” it says.

The bulletin concludes by highlighting the factors that may help India’s economy: “If the commodity price moderation witnessed in recent weeks endures alongside the easing of supply chain pressures, the worst of the recent surge in inflation will be left behind, enabling the Indian economy to escape the global inflation trap and enjoy the fruits of the ebullient supply response that is taking place.”

It cautions: “The international environment is hostile and hence, close and continuous monitoring of the widening trade deficit and portfolio outflows is warranted, notwithstanding strong reserve buffers, moderating external debt and a fairly valued exchange rate that has wilted less in the face the monotonic strengthening of the US dollar than many peers”