(Bloomberg) -- India’s consumer price inflation will overshoot the central bank’s target range this year to average around 7.5%, a former member of the monetary policy committee said, with the benchmark repo rate likely to rise as high as 6% by the end of the tightening cycle.
Mridul Saggar, who was in-charge of the monetary policy department as well as the research cell at the Reserve Bank of India until he retired late last month, said in an emailed interview it is almost certain that inflation will breach the upper tolerance level of 6% in each quarter this year. India’s financial year runs from April to March.
As a result, “monetary policy will have to confront inflation persistence and work hard to contain second-round effects with some growth sacrifice but without squelching growth,” he said.
The RBI targets inflation in the 2%-6% band and has forecast it to average at 5.7% in the fiscal year to March 2023. That is below economists’ forecasts for an average reading of 6.2% in a Bloomberg survey. If headline retail price inflation stays above 6% for three straight quarters, Indian laws require the RBI to write a letter to the government laying out the reasons for failing to meet its mandate as well as suggest remedial measures to bring prices under control.
On Monday, Governor Shaktikanta Das told a television channel that the RBI had gone back to the drawing board and was still working out the latest inflation forecasts. Those forecasts will be released in June along with the rate decision.
“It is a no brainer that RBI will have to revise its inflation forecasts upwards,” Saggar said.
“The quantum of revision will be closely watched. The fact that RBI projected an annual average inflation forecast of 4.5% at the time of February policy in some ways means that it needs to relook at its inflation forecasting exercises. Considering the misses in the recent times, it is not the models that need as much refinements as the assumptions that goes into it,” he added.
Here are some more excerpts from the interview:
- Saggar said the weekend’s cuts to fuel taxes will bring some relief on the inflation front, though stubborn price pressures means the central bank will have to keep raising rates. He expects the terminal repo rate in this hiking cycle at “around 6%”
- NOTE: India’s Hawkish Pivot Seen Lifting Repo Rate to Three-Year High
- The fuel duty cuts should lower inflation by about 28 basis points besides having an indirect impact over time
- Saggar said that a lot of bond traders are under a “mis-conceived notion” that the RBI will hike along with the Federal Reserve to preserve rate differentials and ensure bond inflows. While RBI did hike rates on the premise that tightening policy is the first line of defense during the taper tantrum, these moves were not very successful, he said
- On the contrary, monetary policy in India will need to factor in that Fed actions will tighten global financial conditions. If in the process it also destroys global demand, it will be much easier for the RBI to end its tightening cycle at a lower terminal rate
- Fiscal space remains rather limited, Saggar said. With India’s public debt/ GDP ratio having touched 90%, a growth slowdown induced by high inflation will make it imperative that fiscal consolidation is front-loaded from the debt sustainability angle
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