The Reserve Bank of India will be required to put its monetary policy ahead of everything else to tackle persistent inflation and secure medium-term growth in India’s economy, the central bank of India said on Friday.
Since January, inflation in India has remained above the apex bank’s tolerance level, prompting it to raise interest rates by a total of 140 basis points this cycle. At its next meeting at the end of this month, the bank is widely expected to raise rates by another 25 to 50 basis points.
“At this critical juncture, monetary policy has to perform the role of nominal anchor for the economy as it charts a new growth trajectory,” the RBI said in an article on the state of the economy that was included in its monthly bulletin.
“Front-loading monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice.”
The RBI stated that the August 2022 inflation rate of 7% was consistent with its forecast that inflation would hit its peak in April and gradually decline over time.
Nevertheless, there was a reemergence of food price pressures, primarily from cereals, even though fuel and core elements such as transportation and manufacturing offered a modest measure of relief, according to the bank.
“We maintain that inflation momentum should ease in Q3 and turn mildly negative in Q4. With base effects being favourable in the second half of 2022-23, inflation should moderate, although upside risks are in the air.”
According to the RBI, aggregate demand in India is solid and positioned to grow even more as the festival season approaches. At the same time, domestic financial conditions continue to stay supportive of growth impulses.
It also forecasts that the country’s current account deficit will remain within 3% of GDP in the current fiscal year through March 2023.
“With portfolio flows returning and foreign direct investment remaining strong, this order of deficit is eminently financeable,” it said.