As Prices Rise, India’s Central Bank Shifts Its Priority From Growth To Combatting Inflation

Analysts told CNBC that inflation in India has risen dramatically and that there are signals that it will continue to rise.

Retail inflation jumped 6.95 per cent in March from a year ago, according to data provided by India’s Statistics Ministry on Tuesday. Retail inflation has now exceeded the central bank’s upper tolerance margin of 6% for the third month in a row.

For a five-year period ending March 2026, the Modi government has directed the Reserve Bank of India to target retail inflation at 4% with a 2% cushion.

India’s central bank raised its inflation projection for the current fiscal year, which ends in March 2023, from 4.5 per cent to 5.7 per cent last week. The RBI also stated that it would shift its focus from encouraging economic growth to inflation control.

“In the sequence of priorities, we have now put inflation before growth. Time is appropriate to prioritize inflation ahead of growth,” RBI Governor Shaktikanta Das told reporters on April 9.

The Reserve Bank of India has decreased India’s economic growth prediction for the current fiscal year from 7.8 per cent to 7.2 per cent, citing rising geopolitical tensions as a reason.

 Over the next 12 months, inflation will continue to rise and remain beyond the RBI’s 2 per cent to 6 per cent goal, according to Sonal Varma, Nomura’s senior economist for India and Asia.

 “Policy rates are ultra accommodative. And we think RBI will have to start a policy course correction starting in June,” she told CNBC’s “Squawk Box Asia” on Wednesday.

Suyash Rai of Carnegie India acknowledged that the benchmark rate might shift.

 “If the March inflation figure leads to a revised forecast, the RBI might raise the rates sooner,” Rai said.

Since May 2020, the RBI has held the benchmark rate at 4%, indicating that it will retain its accommodative posture while focusing on inflation.

The surge in inflation was expected, according to V. Anantha Nageswaran, the Indian government’s main economic advisor.

“The central bank has very clearly signaled that it is now committed to prioritizing inflation containment rather than to supporting growth,” he said.

Nageswaran also stated that the government had taken steps to curb food inflation, such as lowering import levies on palm oil imports.

“But we should not forget that what we are dealing with is a global phenomenon,” Nageswaran told CNBC.

When asked if the government will lower fuel taxes to offset rising petroleum costs, he said the issue would be monitored for the time being.

“If prices sustain at high levels for a quarter or two or longer, beyond $110 [a barrel], there has to be some sort of burden-sharing between the government and households,” he said, though he added fuel consumption should come down through wider use of public transport.

The current fear of inflation, according to Nageswaran, is an indication of a maturing economy.

“The fact that India is now getting exercised about inflation rates that are around 6% to 7% is a sign of a maturing of the Indian economy… because earlier, India’s average inflation rate used to be around 7% for the best of five decades or so, until 2010. But the fact that now we are getting very concerned about 7% as a sort of a big inflation rate shows that expectations are indeed shifting.”

(Adapted from CNBC.com)



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