An RBI article on Friday favoured frontloading of monetary policy actions, such as interest rate hikes, to contain inflationary pressures without sacrificing medium-term economic growth prospects. The article titled 'State of the Economy' comes two weeks ahead of the next bi-monthly monetary policy review on September 30 when it is widely expected that the central bank will go for another rate hike.

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The RBI, however, said the opinions expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India (RBI). Loss of momentum in global economic activity may be taking the edge off inflation, which remains elevated, said the article by a team lead by RBI Deputy Governor Michael Debabrata Patra.

The Indian economy is poised to shrug off the modest tapering of growth momentum in the first quarter of 2022-23, it added. Aggregate demand is firm and poised to expand further as the festival season sets in. Domestic financial conditions remain supportive of growth impulses, the article noted.

"Inflation remains elevated and above the tolerance level, underscoring the need for monetary policy to keep second order effects contained and inflation expectations firmly anchored," the authors said. The retail inflation cut short its three-month declining trend and inched up to seven pecent in August, mainly due to higher food prices.

The consumer price index (CPI) based inflation, which the RBI factors in for its monetary policy, has remained above its upper threshold of six percent for eight months in a row. Based on the recommendations of the RBI Governor-headed Monetary Policy Committee (MPC), the central bank has already raised the key short-term lending rate by 140 basis points in three tranches since May this year to check inflation.

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The next meeting of the MPC is scheduled during September 28-30, 2022. The article said there is a resurgence of food price pressures, mainly stemming from cereals.

On the food front, there is also a need to brace for the impact of the predicted delayed withdrawal of the monsoon, it said. The article also mentioned the huge uncertainty surrounding energy prices in spite of the recent softening. It said India's $750 billion export target for the current fiscal is appearing within reach.

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At this critical juncture, the authors said, monetary policy has to perform the role of nominal anchor for the economy as it charts a new growth trajectory. The focus should be on being time consistent in aligning inflation with the target. "In this context, front-loading of 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 times of conflicting possibilities — elevated inflation and rising recession risks; economic stagnation and increasing debt; strengthening US dollar and weakening currencies in the rest of the world; easing supply chain pressures and reshoring; synchronisation in policy actions and deglobalisation; and balance sheet normalisation and liquidity stress. The Indian economy continued to tread a path of recovery in 2022-23 in spite of some loss of momentum due to global headwinds, it added.

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First Published:Sept 17, 2022 12:18 AM IST