Mumbai, July 16
Lower orders of rate hikes can bring down inflation faster, conditional upon higher exchange rate pass-through (ERPT), according to Reserve Bank of India Deputy Governor MD Patra.
Updated estimates of time-varying ERPT suggest an increase in pass-through of exchange rate changes to domestic inflation in India in the recent period, he said.
ERPT, which refers to the change in inflation due to a unit change in the exchange rate, has risen from 0.11 in the pre-pandemic period to 0.18.
“Rising levels and volatility of inflation, exchange rate volatility and higher crude oil prices have led to higher ERPT.
“This focuses attention on increased monetary policy vigilance on the growing role of imported inflation, especially if external shocks become stronger,” Patra said in a speech delivered in a ‘Seminar of Policy Issues: Interface with Professional Forecasters’ earlier this month.
He noted that on the other hand,
this strengthens the exchange rate channel of monetary policy transmission, implying that lower orders of rate hikes can bring down inflation faster, conditional upon the higher ERPT.
The Deputy Governor’s observations come in the backdrop of the rupee depreciating almost 7 per cent since the beginning of Russia-Ukraine war and the RBI hiking the policy repo rate from 4 per cent to 4.90 per cent in two stages.
atra observed that the high frequency indicators for Q1: 2022-23 are mixed; however, amidst a sea of red and yellow, greens are making their appearance, mainly reflecting the revival of contact-intensive sectors.
On the basis of these indicators, RBI’s nowcast for Q1:2022-23 range between 15.5 and 16.7 per cent while the Survey of Professional Forecasters’ (SPF) median forecast is 14 per cent.
“Our nowcastfind a marginal improvement in momentum, with the 15.5 per cent nowcast having no momentum.
“Is it the case that professional forecasters see negative momentum in Q1: 2022-23? In Q2, we see an improvement in momentum (5.4 per cent) but weighed down by base effects,” the Deputy Governor said.
According to an article in RBI’s latest monthly bulletin, in a global landscape marred by fears of recession and war, the Indian economy shows resilience.
“The recent revival of the monsoon, the pick-up in manufacturing and services, stabilisation of inflation pressures and strong buffers in the form of adequate international reserves, sufficient foodgrain stocks and a well-capitalised financial system together brighten the outlook and strengthen the conditions for a sustainable high growth trajectory in the medium-term,” per the article “State of the Economy.”
Published on July 16, 2022