World Bank sees inflation declining in India

6 December, 2022 | Vaishali Sharma

World Bank World

The World Bank forecasted 7.1 percent inflation in the current fiscal year on Tuesday, but warned that a drop in commodity prices might temper inflationary pressures.

The World Bank forecasted 7.1 percent inflation in the current fiscal year on Tuesday, but warned that a drop in commodity prices might temper inflationary pressures.

In India, October inflation fell to 6.77 percent from 7.41 percent the previous month, owing primarily to lower food prices, while it remained above the Reserve Bank’s tolerance limit for the tenth month in a row. The World Bank published its India Development Report, titled “Navigating the Storm,” today.

“Inflation is a little higher than the RBI limits. The driving factor for this is largely food and our expectation is that by next year, inflation will decrease and fall under the RBI band of 2 per cent to 6 per cent. We expect it to be 5.1 per cent in the next FY,” said Dhruv Sharma, the World Bank senior economist and lead author of the report.

According to the report, the country’s fiscal policy backed up the RBI’s rate moves by lowering excise duty and other fuel taxes in order to mitigate the impact of increasing global oil prices on inflation.

The research, however, highlighted that there is a trade-off between attempting to restrict the negative impact of global spillovers on India’s economy and limited policy flexibility.

According to the study, both fiscal and monetary policy levers have played a role in addressing the difficulties that have evolved over the last year.

According to the World Bank report, quick monetary policy tightening in advanced countries has already resulted in massive portfolio outflows and devaluation of the Indian rupee, while rising global commodity prices have caused the current account deficit to worsen.

However, the analysis claimed that, in comparison to other developing countries, India’s economy is comparatively immune to global spillovers. This is due in part to India’s enormous local markets and its minimal exposure to foreign trade flows.

The Reserve Bank of India’s Monetary Policy Committee (MPC) began a three-day meeting on Monday. Financial markets will be watching the committee’s rate hike stance closely, as inflation remains above the 6% target band.

Since May, the central bank has raised the key policy rate by 190 basis points to 5.9 percent in order to cool domestic retail inflation, which has remained above the RBI’s upper tolerance limit for more than three quarters. Retail inflation was 6.77 percent in October, down from 7.41 percent the previous month.

In early November, the Reserve Bank of India’s Monetary Policy Committee (MPC) met out of turn to discuss and draught the report to be sent to the central government for failing to meet the inflation mandate.