India’s RBI Tolerating Faster Inflation Amid Growth Focus

Varieties of rice are displayed for sale at a store at the Kondli Wholesale Market in Noida, Uttar Pradesh. (Photographer: Prashanth Vishwanathan/Bloomberg)

India’s RBI Tolerating Faster Inflation Amid Growth Focus


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Indian monetary policy makers are tolerating inflation rates higher than their 4% medium-term target while they focus resources on an economic rebound.

Economists see the Reserve Bank of India taking a grin-and-bear it approach to price pressures as it seeks to help Asia’s No. 3 economy recover from one of the world’s worst coronavirus outbreaks. The RBI has chosen to look through a recent surge in inflation because it was supply-side driven, and will only turn persistent when demand kicks in, Deputy Governor Michael Patra said at a briefing June 4.

While the wholesale price print due Monday made for another grim reading, retail inflation surged past the upper limit of the RBI’s 2%-6% target band for the first time since November last year. Monetary policy makers have been ignoring the acceleration and earlier this month retained an “accommodative” stance for as long as needed to restore growth on a durable basis.

India’s RBI Tolerating Faster Inflation Amid Growth Focus

“The RBI has clearly turned more tolerant of inflation and by the looks of it, they seem to be OK with the headline rate above the mid-point target of 4%,” said Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics in Singapore. “We expect growth concerns to dominate and push out policy normalization well into 2022.”

The RBI isn’t thinking about normalization at the moment, Governor Shaktikanta Das said this month. His rate-setting committee, which cut borrowing costs by 115 basis points in 2020, has kept rates unchanged at a record low for more than a year to support growth after a rare contraction last year. While the central bank sees the economy expanding 9.5% in the year started April 1, that is slower than the 10.5% pace it had forecast before a deadly second wave of coronavirus swept through the nation of more than 1.3 billion people.

A string of lockdowns to stem the pandemic crippled activity and throttled demand in an economy that’s primarily driven by domestic consumption. High taxes and rising unemployment has also left consumers wary of spending, as well as glum about future prospects.

So although data Monday showed wholesale prices grew 12.94%, the swiftest rate since June 1992, it’s unlikely yet to fully feed into consumer prices. Companies have absorbed some of the increase in producer prices given weak demand in the economy. Consumer price growth data for May accelerated to 6.3%, well above the median forecast for a 5.4% gain in a Bloomberg survey of economists.

The six-member Monetary Policy Committee is convinced that sticky inflation is due to supply-side problems and doesn’t yet warrant withdrawal of the extraordinary measures, such as keeping benchmark rates at record low, ensuring ample liquidity and a program to buy government bonds.

A group of researchers led by a former MPC member Ravindra Dholakia went as far as suggesting that a looser inflation target could help boost growth. They, in an RBI-sponsored working paper last month, concluded that a higher threshold for inflation is conducive for growth in emerging economies.

For India, growth is maximized if inflation is allowed to rule around 6%, and minimized once prices spike to 9.5%, the researchers wrote.

This isn’t the first time that there’s been a call for a looser inflation target. However, the government earlier this year renewed the RBI’s inflation targeting mandate that requires it to keep price-growth at the 4% midpoint of a 2%-6% target band. The central bank expects inflation to end up at 5.1% in the fiscal year ending March.

The latest pick up in inflationary pressures is caused by higher food and fuel prices along with stubborn underlying price pressures, according to Bloomberg Economics’ Abhishek Gupta, who doesn’t expect a hawkish response from the RBI.

“The RBI sees inflation staying below the 6% upper end of its target range this fiscal year,” he wrote. “And its focus now is on supporting a recovery with an accommodative stance.”

©2021 Bloomberg L.P.

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