Measures taken by the Reserve Bank of India (RBI) and the government will reduce the duration of elevated inflation in FY23, which is mostly through the imports channel due to high crude and edible oil prices, the finance ministry said in a report.
“Further, since aggregate demand is recovering only gradually, the risk of sustained high inflation is low,” the finance ministry said in its monthly economic review for April.
India’s retail inflation hit an 8-year high of 7.79% in April, the government data showed on Thursday.
Notwithstanding the presence of inflationary headwinds, the capex-driven fiscal path of the government, as laid down in Budget 2022-23, will help the economy post a near 8% growth in real GDP for the current year, the ministry report noted.
With regard to forex reserve, it said the reserve was at a comfortable level of $597.7 billion as of April 29, providing an import cover of about 11 months for financing investment and consumption in the country.
The reserves have been steadily declining under pressure from outflow of foreign portfolio investments responding to monetary tightening by central banks in advanced economies, it said.
“Seen over a longer time horizon, inflation in India’s economy has not been as much a challenge as is sensed from month-to-month changes. CPI Inflation during FY22 averaged 5.5%, 50 basis points below the upper limit of the RBI MPC’s inflation band, and lower than 6.2% for FY21. While inflation is expected to be elevated in 2022-23, mitigating action taken by the Government and RBI may reduce its duration,” the ministry report noted.
Beginning May, most of the major central banks, including the US Federal Reserve and the Bank of England, also increased their benchmark rate to rein in soaring inflation.
Markets, as the rising bond yields show, have already priced in the increase in policy rates, including the ones expected later in the year, besides absorption of excess liquidity, the report said.
Global growth watchers, as their slowing growth projections reflect, have also factored in monetary tightening the world over to calm down global inflation, it said.