Inflation peaked in January: Michael Patra

Headline retail inflation has peaked and will ease from hereon, RBI Deputy Governor Michael Patra said on Wednesday, terming criticism about the central bank being behind the curve on inflation ‘unfair’ as the economy was still coping with output and livelihoods lost to the pandemic.

“We have dug out of the deepest recession in the world and 2021-22 is estimated to close with a GDP growth rate of 9.2%, but most people don’t focus on the fact that at this rate of growth, India is only 1% above pre-pandemic levels of GDP,” he said. As the economy was already in a cyclical downturn before the COVID-19 lockdowns , he noted that India had lost at least 10-15% of output ‘forever’.

“Inflation is a case of statistical effects in India. And if you look at the momentum, it is actually declining, so India is in a comfortable position… we have the headroom to support growth. And we will do so because we are dealing with lost output, lost livelihoods. So I think it is an unfair judgment,” Mr. Patra asserted at a discussion with the central bank governors of the Philippines and Sri Lanka.

“ But RBI reserves the right to choose it’s time to normalise,” he added at the Asia Economic Dialogue 2022, hosted by the Ministry of External Affairs and the Pune International Centre.

“Our sense is that headline inflation has peaked in January, and from here on it will ease down to the target of 4% by the last quarter of 2022-23. And this has provided us the space to maintain policy rates low and persevere with an accommodative stance so that we can focus all energies on accelerating and broadening the recovery,” he said.

The upswing in global inflation, Mr. Patra said, is the price of ‘bounding too quickly out of the pandemic’s downturn’ with policy makers finding it easier to ‘revive revenge spending than to bring supply capacities on stream’. He warned that the extreme volatility in markets, triggered by an increasing number of central banks tightening or indicating the intent to normalise policy, was the biggest risk to the global economic recovery and may even tip it ‘into a premature recession’.

Stressing that India will take a different policy stance than the rest of the world, he said that efforts to address immediate inflation pressures across countries, may not work as ‘today’s actions can at best be expected to impact inflation six to 12 months down the line’ but most projections show inflation peaking in the middle of 2022 and easing thereafter.