monetary policy: India's inflation fight will not be painless, says RBI deputy governor Michael Patra

Inflation will return to the Reserve Bank of India’s mid-point target in two years, a senior central banker said, with policy actions aimed at cooling price pressures set to take a toll on the economy.

Speaking at an industry meet in New Delhi, Deputy Governor in charge of monetary policy, Michael Patra, said inflation based on the consumer price index, would stay above the RBI’s target range of 2%-6% for the next three quarters. Those comments caused a sell-off in the bond market, with the yield on the 10-year sovereign note jumping as much as 5 basis points, before easing a bit.

Failure to keep inflation within the mandated range for three straight quarters will force the RBI to write a letter to the federal government, explaining why it missed the target and lay out remedial measures. The RBI has already raised the benchmark repo rate by 90 basis points in the recent past and is poised to hike it further as the six-member rate-setting panel steps up its fight to cool prices.

Patra, a member of the monetary policy committee, said it was necessary to bring down inflation below 6%, because elevated price pressures “unambiguously” hurt growth. He added that even though containing food and fuel prices was outside the remit of the central bank, it was important to tame the second-round impact from elevated prices.

While the inflation outlook is “tethered to the war in Ukraine,” the RBI “will not sit idle,” Patra said. He added that while high inflation indicated there was demand in the economy, most of it was because of the so-called ‘revenge spending’ after the pandemic years.

He sounded a slightly optimistic tone on inflation, adding there were signs the worst was probably over.

“There are indications that inflation is peaking as monetary policy works through into the economy,” Patra said, adding CPI is expected to drop below 6% in the fourth quarter of 2023 and ease to touch 4% in two years.

Patra said the RBI was actively intervening in the foreign exchange market to avoid undue volatility. He described the depreciation in the local currency as the lowest in the world — the rupee has lost over 5% against the dollar so far this year — compared to over 7% for the Philippine peso and more than 8% for the South Korean won.

“We are in the market,” Patra said, adding RBI will not allow “disorderly, jerky movement.”