Inflation likely to stabilise rest of the year: RBI’s August bulletin

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August 18, 2021 2:30 AM

“So far, inflation is on track to staying within the trajectory envisaged and it is likely to stabilise during the rest of the year. In our view, this is a credible forward-looking mission statement for the path of inflation,” said the authors, one of whom is deputy governor Michael Debabrata Patra.

The bulletin said that views expressed in the article are those of the authors and do not necessarily represent the views of the central bank.The bulletin said that views expressed in the article are those of the authors and do not necessarily represent the views of the central bank.

Inflation is set to follow the trajectory anticipated by the central bank and may stabilise during the rest of the current financial year, executives at the Reserve Bank of India (RBI) wrote in the State of the Economy article in the August bulletin.

“So far, inflation is on track to staying within the trajectory envisaged and it is likely to stabilise during the rest of the year. In our view, this is a credible forward-looking mission statement for the path of inflation,” said the authors, one of whom is deputy governor Michael Debabrata Patra.

The bulletin said that views expressed in the article are those of the authors and do not necessarily represent the views of the central bank.

The article defended the monetary policy committee’s (MPC’s) decision to focus on growth and its assessment of recent high inflation prints as a transitory trend. It said that the MPC’s decision to continue with the accommodative stance is backed with all available evidence – mobility-, activity- and survey-based. “Yet it is, in the ultimate analysis, a judgment call because at the heart of the association between growth and inflation, a sacrifice is embedded. A reduction in the rate of inflation can only be achieved by a reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere,” the authors said.

Referring to this concept of the sacrifice ratio in economics, the authors said that the latest estimates for India suggest that for a one percentage point reduction in the rate of inflation, 1.5-2 percentage points of gross domestic growth (GDP) growth has to be foregone. The MPC voted to give growth a chance to claw its way back into the sunlight. Since growth had fallen in 2019-20 to its lowest rate in the 2011-12 based GDP series and after two waves of the pandemic in 2020-21 and the first half of 2021-22, it could not conceivably be higher than in 2019-20.

If the MPC doggedly attacks the supply shock induced price pressures in spite of the current state of the pandemic-ravaged economy and as a consequence, economic activity may wilt into depression, the RBI said. “No amount of humility will wipe away the tears then. Also, our MPC is India-focused; it has to be. It must choose what is right for India, emulating none, not emerging nor advanced peer,” the article said.

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