MPC members are yet to elaborate on what their expectations of the terminal rate is, considering the long lags, the committee must front-load the rate hikes.
To tackle price pressures in the economy, the Monetary Policy Committee has over the course of the last two meetings raised the policy repo rate by 90 basis points to 4.9 per cent.
In line with expectations, retail inflation, as measured by the consumer price index, dipped marginally to 7.01 per cent in June, down from 7.04 per cent the month before, as per data from the National Statistical Office released on Tuesday. This latest data implies that inflation has averaged 7.3 per cent in the first quarter (April-June) of the ongoing financial year, marginally lower than the Reserve Bank of India’s June forecast of 7.5 per cent. However, this is the sixth straight month in which inflation has come in above the upper threshold of the central bank’s inflation targeting framework.
The disaggregated data shows that the consumer food price index fell to 7.75 per cent, down from 7.97 per cent in the previous month. This decline in food inflation was driven by eggs, pulses, and moderation in prices of other items. While in the weeks thereafter, the fall in edible oil prices will impart a moderating influence, a lot depends on how the monsoon plays out. The kharif sowing has been slow. However, since June 30, there has been a pick-up in the monsoon which should spur sowing — till the first week of July, the area sown under kharif was around 9 per cent lower than last year. Equally worrying, core inflation, which strips away the volatile food and energy components, continues to remain elevated. Almost all components, from clothing and footwear to household goods and services, recreation and amusement and personal care, witnessed price pressures, suggesting that the firming up of demand for services will continue to exert pressure on prices.
A few days ago, RBI Governor Shaktikanta Das, speaking at an economic conclave, said that price pressures will gradually ease in the second half of the current financial year. Prior to that, RBI Deputy Governor Michael Patra noted that there are signs of inflation peaking, and harsh policy may not be needed to contain price pressures. While global commodity prices (fuel and base metals) have eased considerably due to fears of a recession, inflation is likely to continue to remain higher than the central bank’s target in the near term. To tackle price pressures in the economy, the Monetary Policy Committee has over the course of the last two meetings raised the policy repo rate by 90 basis points to 4.9 per cent. Considering that the pre-pandemic rate stood at 5.15 per cent, this implies another hike of 25 basis points to simply revert to the pre-pandemic level. While the MPC members are yet to elaborate on what their expectations of the terminal rate is, considering the long lags, the committee must front-load the rate hikes. The central bank must continue to prioritise inflation management as price stability is central to macroeconomic stability.
This editorial was first filed in the print edition on July 13, 2022 under the title ‘First, price stability’.