The central bank of India is on course to bring down prices but the retail inflation rate is likely to remain above the top end of its mandated target band until December, Governor Shaktikanta Das said in an article in the Times of India on Friday.
We are well on track to bring down inflation and inflation expectations. CPI is expected to remain higher than the upper tolerance level until December. It is expected to go below 6% as per our current projections, Das said.
Retail inflation fell marginally in May after touching an eight-year high of 7.79% in April, but it remained above the central bank's tolerance band of 2 -- 6% for a fifth month in a row.
Even though current inflation is driven by supply-side factors, monetary policy still plays an important role when inflation rises as household price expectations are backward-looking.
Inflation expectations affect not only households but also businesses and drive up the price of food, manufactured goods and services. Even if they expect inflation to be high, even companies will defer their investment plans, he added.
India's economy is stable, and continues to recover steadily from the shocks of the COVID-19 epidemic, according to Das.
He said that the monetary policy tightening in advanced economies was a reason for the pressure on the rupee, which hit a new low of 78.39 against the dollar on Wednesday.
There will be an outflow of capital from emerging market economies in such a situation. It is happening across emerging market economies. He said that this is nothing but the spillover of the monetary policy actions in advanced economies.
But he said 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.
India's monetary policy committee MPC raised rates by 50 basis points earlier this month after a 40 basis increase in May to prevent growing inflationary pressure from becoming broad-based. There are more hikes in the coming months.