Inflation to peak further till December: RBI Guv

Mumbai: Reserve Bank of India is on track to bring down prices but the retail inflation rate is likely to remain above the mandated target band of 6 per cent until December, Governor Shaktikanta Das said in an interview to Times of India. Inflation is expected to go below 6 per cent only in the fourth quarter of FY23, in line with RBI's projection, he said.

"Inflation has now become broad-based and that is the issue which we are now addressing through our actions," Das said.

Retail inflation eased marginally in May, after touching an eight-year high of 7.79 per cent in April, but remained above the central bank's tolerance band of 2-6 per cent for a fifth month in a row.

Das said despite current inflation being driven by supply-side factors, monetary policy still plays an important role when inflation rises since household price expectations are backward-looking.

When asked why the repo rate wasn't hiked earlier, Das said, "In our April 2022 policy, we sent out a clear message by prioritising inflation over growth. We introduced the Standing Deposit Facility at a rate that was 40 basis points higher than the reverse repo rate. Consequently, the overnight call rate – which is the operating target of monetary policy – moved up in tandem."

"The idea behind these steps was to take out liquidity from the system in a very gradual and orderly manner. Unless you take out excess liquidity, overnight call rates will not respond to rate hikes and will remain lower. So, you have to deal with the problem of excess liquidity first," noted the RBI governor in the interview.

Das also said India's economy is stable and continues to steadily recover from the shock of the COVID-19 pandemic.

He said pressure on the rupee, which hit a record low of 78.39 against the dollar on Wednesday, was largely due to the monetary policy tightening in advanced economies to tackle high inflation.

"In such a situation, there will be outflow of capital from emerging market economies. It is happening across emerging market economies. This is nothing but the spillover of the monetary policy actions in advanced economies," he said.

But added that India's foreign exchange reserves are quite strong at around two-and-half times the country's short-term foreign debt and the country's macroeconomic fundamentals are far better than many other countries.