Home / Economy / Inflation coming off its peak a source of relief, says RBI

Today, the Reserve Bank of India published the monthly Bulletin for July 2022. Eight speeches, six articles, and current economic statistics on India are included in the Bulletin. The Indian economy exhibits strength in the face of significant global challenges scarred by worries about downturn and conflict.

“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," says RBI.

“The role of monetary policy in response to supply-driven inflation has attracted a lot of attention in the wake of current global inflationary episode. This article using simulations from the Quarterly Projection Model to an adverse supply shock characterized by an increase in crude oil price shows that monetary policy response is conditioned by a) the nature of the shock; b) aggregate demand conditions; c) monetary policy credibility; and d) the reaction of other agents in the economy to the shock," RBI has further added.

The worst of the recent spike in inflation will be behind, according to RBI, provided the slow-down of global commodity prices seen in recent weeks persists coupled with the relaxation of supply chain constraints. Consumer pricing index (CPI) data showed that inflation was 7.01 per cent in June, compared to 7.04 per cent in May and 7.79 per cent in April. Significant easing in the prices of commodities worldwide. Multiple signs point to the Indian economy continuing to grow resolutely in the first quarter of FY23, RBI reports, despite the burden of global shocks, high inflation, and other geopolitical factors.

With an outflow of 49,469 crore in June—the highest monthly outflow since March 2020—foreign portfolio investors (FPIs) were net sellers in the Indian equity market for the ninth month in a row. The sell-off persisted in July up until July 8, 2022, totalling 3,716 crore and overall, FPIs have pulled 1.2 lakh crore out of the Indian equity market in 2022–2023. The rupee has fallen to a record low, but FPI dumping, trade deficits, and the rise of the dollar index have all played a role in this decline. According to research by Bank of America Securities, which was cited by PTI, India's current account deficit is expected to reach $105 billion (about 8.37 lakh crore), or 3 per cent of its gross domestic product, this fiscal year. In 2021/22, CAD represented 1.2 per cent of GDP, according to information provided in June. A weakening rupee could increase the current account deficit, since India imports around 80% of its oil needs. The RBI has also suggested the rupee settlement mechanism for international trade.

RBI said “the role of supply side factors in shaping the trajectory of food inflation and inflation in general has been well-recognised. Timely and reliable indicators of crop production are key to assessing inflationary trends in the near future. In this context, the study explores the utility of satellite imagery-based vegetation indicators for assessment of commodity arrivals in agricultural mandis, well in advance."

“The electronification of global foreign exchange (FX) trading with the emergence of multi-bank platforms has transformed the execution of trade and price discovery. Some of these changes can be seen even in the onshore Indian Rupee (INR) market, albeit in a limited way. This article documents the recent changes in FX markets in India in terms of electronification and its broader implications," says the article of RBI. The recent introduction of new types of trading channels, such single-bank platforms (SBPs) and market-makers, such as main trading companies, has been characterised as the electronification of global FX trading (PTFs). With expanding trading volumes on such platforms, SBPs have also been more noticeable in the Indian FX market in recent years, according to RBI.

According to a forecast by BofA, the country's CAD is anticipated to reach $105 billion or 3% of GDP this fiscal year, mostly as a result of the steadily expanding trade imbalance. "Although we continue to see Brent at $105 a barrel in 2022, higher non-oil, non-gold imports and lower exports are now likely to push CAD to 3 per cent at $105 billion, up from 2.6 per cent of GDP or $90 billion projected earlier," Bank of America (BofA) Securities said in a report.

The Indian rupee is comparably better positioned than other foreign currencies versus the dollar, according to Finance Minister Nirmala Sitharaman's statement from last week. Considering that India imports more than 80% of its crude oil, inflation would be the most affected by the dropping rupee. Since Russia's invasion of Ukraine, crude oil prices have consistently been over $100 per barrel. The rupee has been falling since the commencing of the year, and Brent Crude reached $113 a barrel in July. “When a supply shock is transitory, inflation returns to the equilibrium without the need for any monetary policy action and that it can look through its initial impact as it lies outside its realm and remit. However, repeated supply shocks generate second round effects necessitating pre-emptive monetary policy action. When the economy is going through a contractionary phase, an adverse supply shock can worsen the monetary policy trade-off, as it can ill afford to weaken demand conditions further by responding to the inflationary impact of the supply shock," said RBI.

“Under an adverse supply shock, by frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target. This will anchor inflation expectations, necessitating less aggressive policy increases in future and, therefore, a lower growth sacrifice," RBI said in its monthly Bulletin report of June.

Although the Indian economy has so far shown itself to be stable, if the weak rupee against the dollar continues, higher raw material prices will continue, which will have an impact on the entire GDP (Gross Domestic Product). Additionally, because gold's market rate and its relationship to the U.S. dollar are inversely proportional, the demand and supply of gold would be affected causing the domestic economy to fall in the face of a strong dollar.

(With inputs from PTI)

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