India’s central bank is on course to bring down prices but the retail inflation rate is likely to remain above the top end of its mandated target band until December, Governor Shaktikanta Das said in an article in the Times of India on Friday.
“We are well on track to bring down inflation and inflation expectations. Until December, CPI is expected to remain higher than the upper tolerance level. Thereafter, it is expected to go below 6% as per our current projections,” Das said.
Retail inflation eased marginally in May, after touching an eight-year high of 7.79% in April, but remained above the central bank’s tolerance band of 2-6% for a fifth month in a row.
Das said despite current inflation being driven by supply-side factors, monetary policy still plays an important role when inflation rises since household price expectations are backward-looking.
“Inflation expectations influence not only households but also businesses and drive up pricing of food, manufactured goods and services. If they expect inflation to be high, even companies will defer their investment plans,” he added.
Das also said India’s economy is stable and continues to steadily recover from the shock of the COVID-19 pandemic.
He said pressure on the rupee, which hit a record low of 78.39 against the dollar on Wednesday, was largely due to the monetary policy tightening in advanced economies to tackle high inflation.
“In such a situation, there will be outflow of capital from emerging market economies. It is happening across emerging market economies. This is nothing but the spillover of the monetary policy actions in advanced economies,” he said.
But added that India’s foreign exchange reserves are quite strong at around two-and-half times the country’s short-term foreign debt and the country’s macroeconomic fundamentals are far better than many other countries.
India’s monetary policy committee (MPC) raised rates by 50 basis points earlier this month, after a 40-bps increase in May, to prevent growing inflationary pressure from becoming broad-based. Further hikes are expected in coming months.