Signs that inflation is peaking amid global monetary policy action: Patra

The RBI Dy Governor says war in Europe threatens to 'snuff out' global economic recovery post the Covid-19 pandemic

The current geopolitical situation arising from Russia's invasion of Ukraine threatens to 'snuff out' global economic recovery post the Covid-19 pandemic, Reserve Bank of India Deputy Governor Michael Patra said on Friday.

Addressing an event by industry body PHD Chamber of Commerce, Patra said that there are signs that inflation could be peaking, even as the global commodity price situation has led to a coordinated monetary policy action.

“The world has been overwhelmed by the fallout of geopolitical conflict, which threatens to snuff out a recovery that was hesitantly and haltingly making its way through multiple waves of the pandemic and multiple mutations of the virus. India’s economic prospects are also challenged by these ongoing developments, and the outlook is darkened and highly uncertain,” said Patra, adding that emerging markets were bearing the brunt of the Russia-Ukraine war despite being bystanders.

“It may be a premature prognosis, but there are indications that inflation may be peaking. As monetary policy works through into the economy and inflation falls back into the tolerance band by the fourth quarter of 2022-23, it will be the playing out of the baseline scenario,” he said.

Headline retail inflation for the month of cooled from the eight-year high in April and came in at 7.04 per cent on the back of the base effect and cheaper food prices. It was still the fifth straight month of CPI inflation being above the MPC’s medium-term target of 4 (+/-2) per cent, thus justifying the two recent interest rate hikes by the Monetary Policy Committee totaling 90 basis points.

Patra said that monetary policy decisions by central banks around the world were aimed at their own specific constituencies. But given that inflation is the biggest policy issue right now, it seemed coordinated.

“The most widespread monetary policy tightening in decades is underway. It is the most coordinated tightening cycle in many years, and the actions are appearing synchronised because imported inflation pressures are being exacerbated by country-specific factors acting at the same time,” Patra said, adding that with headline inflation having moved up by 80 bps in April but reverting by almost the same magnitude in May, the RBI has surged ahead of the curve.

Patra said that the Central Bank will not allow unorderly movement of the rupee and stressed that the Indian currency has witnessed least depreciation in recent times due to high foreign exchange reserves of around USD 600 billion.

"We will stand for its stability, and we're doing it on an ongoing basis even as I speak. We are there in the market. We will not allow disorderly movements. We have no level in our mind, but we will not allow jerky movements that is for certain and let it be widely known that we are in the market defending the rupee against volatility," he said.

On Thursday, Rupee had closed at its all-time low of 78.32 against the US dollar. However, in the morning session on Friday it opened 12 paise up at 78.20 against the US dollar.

Patra warned that the recent monetary policy actions were not without consequences and will take a toll on spending and demand. “That is the price of stability. What the RBI is trying to do is to stabilise the price situation when the economy is able to bear it because in the longer run, price stability is beneficial for growth,”

With real possibility of three consecutive quarters of headline inflation being above the MPC’s medium term target upper limit of 6 percent, Patra said that monetary policy is accountable without any escape clauses.

As per the RBI Act, the RBI Governor has to explain to the government why the MPC failed in its targets if inflation goes above 6 percent or stays below 2 percent for three consecutive quarters.