RBI Bulletin: India's Inflation Still Elevated, May Need Monetary Policy Response

CPI inflation dipped to 6.71 per cent in July and helped by a slower increase in food and fuel prices but it remained above the RBI's 2 per cent to 6 per cent tolerance band

India’s inflation may still require a monetary policy response going forward as it remains above the target range even though it has eased in recent months, the Reserve Bank of India (RBI) said in the monthly bulletin released on Thursday.

"In India, supply conditions are improving, with the recent monsoon pick-up, strong momentum in manufacturing and a rebound in services," the central bank said in an article on the state of the economy.

The RBI said, “Inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward.”

India's consumer inflation dipped to 6.71 per cent in July, easing for the third month in a row and helped by a slower increase in food and fuel prices but it remained above the RBI's 2 per cent to 6 per cent tolerance band for a seventh straight month.

"Imported inflation pressure points remain the overarching risk, followed by pending pass-through of input costs if producers regain pricing power, and wages," RBI mentioned. However, after April-June, the task before the MPC would be to guide inflation to its target of 4 per cent. This may prove to be more "arduous" than the loss of height into the tolerance band, the central bank said.

The RBI is only two months away from failing to meet its inflation mandate, which is deemed to occur when average inflation is outside the 2-6 percent tolerance range for three consecutive quarters.

The Monetary Policy Committee (MPC) has hiked the repo rate by a total of 140 basis points in three steps since May to tame inflationary pressures in the economy. Economists expect the MPC to slow the pace of hikes in the coming quarters.

According to the monthly bulletin, a “heartening development” in recent times has been the easing of inflation in July by 30 basis points from June and an “appreciable” 60 basis points from the average of 7.3 per cent for April-June 2022. This has validated the central bank’s hypothesis that inflation may have peaked in April. For the rest of the year, the RBI’s projections scent a steady easing of the momentum of price changes, the bulletin said.