The Reserve Bank of India is behind the curve on controlling inflationThe Reserve Bank of India is behind the curve on controlling inflation and will have to act faster and more aggressively later if it does not do so soon.Supply-driven inflation has been India’s bane for years before the pandemic, and with most parts of the country opening up and easing COVID-19 restrictions, the demand is expected to rise.Price pressures have risen globally, driven by the pandemic-led supply disruptions, which do not seem to disappear anytime soon.What has not helped is the escalation in Russia-Ukraine border tensions, which has pushed oil prices to touch $100 per barrel for the first time since 2014, with no end in sight for an immediate de-escalation or easing in energy costs.The latest reading showed India’s retail inflation in January was above the upper end of the RBI’s 2-6% target. The central bank has been criticised widely for not unwinding its monetary stimulus.When asked if the RBI was behind the curve on inflation, Kunal Kundu, India economist at Societe Generale, said, “we believe it is. The persistence of elevated inflation is a reality and is difficult to be wished away by not acting. The central bank’s rather benign inflation forecast for FY23 is in sharp contrast to street expectations and suggests the likelihood of delayed action.””But we see multiple pressure points building up which would keep inflation quite beyond 5.0% next year. The potential price for delayed action could be an aggressive rate hike at a later stage, which could come at the cost of economic recovery,” he added.Last year, most major central banks termed inflation as transitory, including the US Federal Reserve, but have had to make a U-turn on those expectations and recognise the risks of runaway inflation since the turn of the year.The Federal Reserve is expected to shrink its balance sheet and simultaneously take rates higher at a much faster pace than previously thought.While that opens up interest rate differential risks to emerging market nations, the RBI wants to focus on the nascent economic recovery.RBI deputy governor Michael Patra, speaking on a central banks panel discussion at the Asia Economic Dialogue, said, “Our sense is that headline inflation has peaked in January, and from hereon it will ease down to the target of 4 per cent by the last quarter of 2022.”Mr Patra suggested expectations that India is behind the curve on withdrawing monetary stimulus is unfair, especially after the deep global recession led by the pandemic and that support for economic recovery is still warranted.A Reuters poll showed the Indian economy grew at a slower pace in the final quarter of 2021, even before the disruptions from the Omicron variant of the coronavirus.Still, global inflation will be pressured by higher oil prices and while India’s inflation may have peaked, expectations remain for price pressures to hold high this year.”Given the current trajectory, the RBI is correct. It will peak during this quarter. The important point, though, is the easing trajectory. Currently, it is above the upper band of RBI’s rather wide comfort zone. So, peaking of inflation in itself is not too comforting,” added Mr Kundu.
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