Inflation remains elevated in the country, with ongoing tensions in West Asia and prospects of a weak monsoon season seen as key risks for the economy, according to Reserve Bank of India (RBI) Governor Sanjay Malhotra.
In an interview with state-owned television channel Doordarshan on Friday, Malhotra said recent price pressures were largely driven by supplyside factors. Official figures released earlier this week showed that the retail inflation, based on the consumer price index (CPI), increased rose above the banking regulator’s 4% target for the first time in nearly a year-and-a-half.
Meanwhile, the rupee was steady at 96.32 per dollar while yields on the 10-year government bonds were little changed at 6.75%.
Diverging from major peers
The RBI has left its benchmark policy rate, the repo rate, unchanged at 5.25% so far this year. It has stood out among major peers in leaving rates unchanged, despite the war West Asia started by the United States and Israel against Iran driving up global crude oil prices. The Indian central bank has argued that the pass-through to domestic inflation has remained limited.
A few weeks after its last monetary policy decision in June, Malhotra told a local news channel in an interview that it was “premature” to discuss monetary policy tightening. Since those remarks, oil prices have rebound as the US and Iran resumed hostilities, threatening shipping through the Strait of Hormuz, which carries about 20% of the world’s crude. India imports nearly 90% of its oil needs, with almost half typically shipped through the waterway before tensions escalated in late February.
The six-member monetary policy committee of the RBI will meet August 3-5. Economists generally expect the RBI to keep borrowing costs on hold for much of this year. Malhotra has repeatedly said policymakers would act only if inflationary pressures broaden in the economy, which does not appear to be the case yet.
Note: “The currencies of many countries have weakened. If we look at it from a global perspective, India’s rupee situation can be considered normal”
SANJAY MALHOTRA
Governor, Reserve Bank of India
Fundamentals still strong
On Friday, Malhotra reiterated that the country’s fundamentals remain strong, with a decent pace of economic expansion despite geopolitical uncertainties. Even so, the challenges for the economy remain and policy makers need to stay in a “wait and watch” mode, he added.
The RBI expects India’s economy to grow at 6.6% this year, downgrading from previous expectation of 6.9%. That pace is much slower than the minimum 8% needed for the economy to expand at for decades to achieve Prime Minister Narendra Modi’s ambition of turning India into a developed nation.
A deficient monsoon, which provides 70% of India’s rainfall, has emerged as a key risk.
This year so far, rainfall has been 23% below its long-term average, impacting crop sowing that may result into higher food inflation later.
In an interview with Bloomberg TV on Friday former Agriculture Secretary Siraj Hussain said that India’s food inflation may cross 7% this year.
“A lot depends on how the rainfall is distributed from now till the end of August,” he said. “But I think we will see inflation in pulses, we will see inflation in oil seeds.”
