*******Need to recognise global factors in inflation and policy coordination, says RBI governor – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/indicators/need-to-recognise-global-factors-in-inflation-and-policy-coordination-says-rbi-governor/articleshow/92767751.cms

Synopsis

Das reiterated that RBI endeavors to bring down the inflation closer to the target of 4% with a moderate slowdown to output growth even when the fear of the US economy slipping into recession looms large due to monetary tightening.

Global factors should get more weight in assessing inflation risks in light of the current developments in Europe, as the war there has a significant impact on the price situation in every country, Reserve Bank of India governor Shaktikanta Das said.

This also underscores the need for enhanced policy coordination and dialogue among countries to achieve better outcomes, Das said, delivering a lecture at an event organised by the Institute of Economic Growth in New Delhi on Saturday.

The governor stressed on the importance of monetary policy in taming inflation and inflation expectations, amid fears that continuing policy tightening could crimp economic growth.

While factors beyond our control may affect inflation in the short run, its trajectory over the medium term is determined by monetary policy," Das said, adding that inflation may start easing gradually in the second half of this fiscal year, precluding the chances of a recession in India.

In its monetary policy announcement last month, the RBI had projected India’s inflation to start easing from the fiscal half starting October, even as accelerating prices remain a concern globally. It projected inflation to be 6.7% in FY23, with Q1 at 7.5%, Q2 at 7.4%, Q3 at 6.2% and Q4 at 5.8%. The consumer price index for May was at 7.04%, compared with April’s 7.79%.

Around 77% of countries reported an acceleration in inflation in 2021 and this proportion is expected to rise further to 90% in 2022, according to the International Monetary Fund’s latest projections. Moreover, two-thirds of these countries are witnessing inflation above 7% against a target of 2% for advanced economies and an average target of 3-5% for emerging market economies.

Das reiterated that RBI endeavours was to bring down inflation closer to its target of 4% with a moderate slowdown to output growth, even when the fear of the US economy slipping into recession due to monetary tightening loomed large.

“Not all episodes of tightening have ended in recession,” he reasoned, pointing out that revisions in GDP projections by major central banks and multilateral agencies in June 2022 indicated a loss of pace in economic growth rather than a loss of level.

The governor also suggested that monetary tightening globally might not last long. “With front-loaded monetary policy actions underway, central banks may not face the need for prolonged actions that lead to recessions,” he said.

Central banks have begun delivering bigger and quicker policy rate hikes to restore price stability, even as the global economy is struggling to recover fully from the scars inflicted by the Covid-19 pandemic.

The persistence of inflation at elevated levels has also raised the debate as to whether the monetary tightening to contain inflation will end in global recession or will the policy makers be able to manage a soft landing, which is a moderation in inflation closer to targets with only a modest slowdown in output growth.

Global factors present difficult policy trade-offs between price stability and stabilising economic activity, especially when the economy is recuperating from repeated shocks, the governor said.

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