The supply outlook is favorable, and inflation may ease during FY23’s second half: Das

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Governor Shaktikanta das on Saturday Inflation is likely to ease gradually in the second half of the ongoing fiscal, “precluding the chances of a hard landing in India”.

“Overall, at this point of time, with the supply outlook appearing favourable and several high frequency indicators pointing to resilience of the recovery in the first quarter of 2022-23, 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,” Das said. “We will continue to calibrate our policies with the overarching goal of preserving and fostering macroeconomic stability,” he added.

The Reserve Bank of India Governor stated that the source of inflation is primarily on the supply side. This means that energy and food prices account more than 50% of the increase in prices. “There are also increasing signs of sectoral price spillovers, given that the rise in global energy and commodity prices quickly translate into higher input price pressures,” he said at an event organised by the Institute of Economic Growth in New Delhi.

Although expectations for household inflation have begun to rise, they are still not very stable at this point. “Overall, we are now living in an era of globalisation of inflation amidst growing deglobalisation of world trade,” Das observed.

With inflation pressures increasing, it is important to take stock of the changing developments. Monetary Policy CommitteeThe RBI’s April and June meetings (MPC) revised the projection of inflation for FY23 by 6.7 percent in two stages. Three-fourths (33%) of June’s revision was due to geopolitical spillovers on food prices.

The MPC also decided that the policy should be increased repo rateBy 40 basis points (bps), and 50 bps respectively in May and June.

This was in addition to the 40 bps effective rate increase that resulted from the introduction of The Standing Deposit Facility(SDF) at 3.75 percent, which caused a concomitant rise in the weighted-average call rate (WACR) compared to liquidity absorption rates under the fixed rate reverse repos regime.

Inflation was projected to fall to 4% by Q3 of FY23. The average inflation rate for FY23 is 4.5%. This assessment was based upon an expected normalization of supply chains and the gradual ebbing off of inflation. Covid-19Das said that normal monsoons and infections are possible. The Survey of Professional Forecasters projected that the median inflation rate would be 5.0% for 2022-23, which was quite benign.

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“This narrative was, however, completely overtaken by the war in Europe since end-February, which led to a sharp spike in global crude oil and other commodity prices,” he said.

March was the hottest month in global food prices. The effects of these high prices were felt in domestic wheat prices, feed cost and edible oil. Further pressures were placed on wheat prices by the unprecedented heat wave that caused Rabi wheat production to stop. Das explained that the war and sanctions also caused supply chain and logistics bottlenecks, which exacerbated cost-push and pushed up prices.

While some advanced economies have experienced a significant increase in their pricing power due to strong domestic demand since 2021 (in other advanced countries and emerging market economies), these pressures are just beginning to affect other advanced economies as well as emerging markets starting 2022.



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