An article published by Rbi promotes the frontloading of monetary policy actions to control inflation


By PTI STI (Update)

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The RBI has stated that the opinions expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India (RBI).

An RBI article on Friday favored frontloading monetary policy actions, such as interest rate hikes, to contain inflationary pressures without sacrificing medium-term economic growth prospects. The “State of the Economy” article comes two weeks before the next bi-weekly monetary policy review on September 30, when the central bank is widely expected to raise rates again.

The RBI, however, has stated that the opinions expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India (RBI). The loss of momentum in global economic activity could dampen inflation, which remains high, according to the article by a team led by RBI Deputy Governor Michael Debabrata Patra.

India’s economy is poised to ignore the modest decline in growth momentum in the first quarter of 2022-23, he added. Overall demand is firm and poised to grow further as festival season sets in. Domestic financial conditions continue to support growth impulses, the article notes.

“Inflation remains elevated and above tolerance, underscoring the need for monetary policy to contain second-order effects and firmly anchor inflation expectations,” the authors said. Retail price inflation broke its three-month downward trend and edged up to 7% in August, mainly due to rising food prices.

Inflation based on the consumer price index (CPI), which the RBI takes into account in its monetary policy, has remained above its upper threshold of 6% for eight consecutive months. Based on the recommendations of the Monetary Policy Committee (MPC) headed by the Governor of the RBI, the central bank has already raised the short-term policy rate by 140 basis points in three tranches since May this year to control the inflation.

The next meeting of the MPC is scheduled for September 28-30, 2022. The article indicates that there is a resurgence of food price pressures, mainly due to cereals.

On the food front, there is also a need to prepare for the impact of the expected delayed monsoon withdrawal, he said. The article also mentioned the huge uncertainty surrounding energy prices despite the recent easing. He said India’s $750 billion export target for the current fiscal year looks within reach.

At this critical juncture, the authors argue, monetary policy must act as a nominal anchor for the economy as it charts a new growth path. Emphasis should be placed on time consistency in aligning inflation to target. “In this environment, anticipatory monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice,” they said.

The article noted that we live in a time of conflicting possibilities – high inflation and growing risks of recession; economic stagnation and rising debt; strengthening of the US dollar and weakening of currencies in the rest of the world; easing pressures on the supply chain and relocation; synchronization of political actions and de-globalization; and balance sheet normalization and liquidity pressures. India’s economy continued on the road to recovery in 2022-23 despite some loss of momentum due to global headwinds, he added.


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