Inflation has flattened and is soon expected to fall, first into the monetary policy committee’s (MPC) tolerance band of 2-6% and then to the target of 4%, said an article by a group of RBI researchers, including deputy governor Michael Patra.
The article said if expectations on seasonal food prices hold, inflation will fall from 7% to 5% in Q1FY24. Earlier, the MPC had forecast inflation to fall to 5% by Q1FY24.
“If these expectations hold, inflation will fall from 7 to 5% in Q1 next financial year – within the tolerance band, hovering closer to the target, but not yet positioned for landing. This is a decisive point in its trajectory,” the paper said.
After Q1FY24, the task before the MPC would be to guide inflation to its target of 4%. “This may prove to be more arduous than the loss of height into the tolerance band,” the article added.
Imported inflation pressure points remain the overarching risk, followed by pending pass-through of input costs if producers regain pricing power, and wages. Yet, the paper noted, some risks have turned down, such as commodity prices, especially of crude, supply chain pressures, and revving up of monsoon activity due to the depression in the Bay of Bengal.
“The next heartening development is the return of capital flows to India after a hiatus when the appetite of portfolio flows to EMEs (emerging market economies) deteriorated as the dollar appreciated breathlessly with the US Fed accelerating its hiking cycle,” the paper said.
Since March 2022, the Institute of International Finance estimates that portfolio investors withdrew $39.3 billion from EMEs, partly offset by inflow of $4.6 billion in the debt segment. Yet, investors appear to have differentiated, according to the authors of the paper.
While commodity exporting EMEs – Brazil, Saudi Arabia, Indonesia, Malaysia, Colombia and Chile – benefited from portfolio inflows into equities, exposures were cut down for China, India and Turkey. In the debt segment, China recorded the largest outflow among EMEs, while other EMEs together recorded net inflows.
“India is becoming a preferred destination for portfolio flows – in August so far (until 12th), equity and debt segments recorded net inflow of $4.4 billion and $0.3 billion, respectively,” the article said. The market value of portfolio investments in India stood at $623.8 billion on August 12, 2022.