Sustained Inflation Over 6 Percent 'Detrimental' to India’s Economic Growth, RBI Governor Warns

India’s retail inflation has remained above central bank's "upper tolerance limit" of 6 percent throughout the financial year 2022-23 because of high energy and food prices. According to the latest official statistics released last month, retail inflation increased to 7.4 percent in September from 7 percent in August.

The trend of retail inflation continuing above 6 percent into the next financial year would be “detrimental” to India’s economic growth, Reserve Bank of India (RBI) governor Shaktikanta Das said on Saturday.

Speaking at the Hindustan Times Leadership Summit 2022 in New Delhi, Das said that India is facing a “major challenge” regarding retail inflation, which has remained above the “tolerance band” of 2 to 6 percent.

According to Das, inflation higher than 6 percent for a medium to long period would be counterproductive as it would act through a “negative loop”.

“Savings will be hit, the financial climate will be hit and India will lose the confidence of investors,” Das explained.

RBI’s Monetary Policy Committee, which is headed by Das, has been instructed by the government to keep inflation in range of 2 to 6 percent.

Das said that the RBI expected retail inflation to drop to below 7 percent for the month of October. The inflation figures for the last month will be released on 14 November, he said.

Das also said that it was still “premature” for the RBI to revise the tolerance limit in view of persistently high inflation levels.

“It is too premature to enter into that debate. It will only reflect a lesser commitment on the part of central banks to fight the war against inflation,” he stated.

‘Triple Shocks’ to the Indian Economy

The RBI governor blamed the “triple shocks” of the COVID pandemic, high energy and food prices caused by western sanctions in the wake of Russian special military operation in Ukraine and the “financial market turmoil” for affecting the overall macroeconomic fundamentals of economies across the world.

He explained that the financial market turmoil is coming from the synchronized monetary policy tightening by central banks around the world, especially by the those in advanced economies. Central banks around the world have resorted to raising their interest rates to tame inflation caused by high energy and food prices.

The US Federal Reserve has raised interest rates by 375 basis points this year, the highest rise in decades. The rise in interest rates has led to a strengthening US dollar, which has also contributed to global inflation in terms of higher import costs and countries being forced to pay more for their dollar-denominated debt.

Das said that New Delhi has better “macroeconomic fundamentals” than most of the advanced and developing economies, as he highlighted that India would be the fastest-growing economy among the major global economies.

The RBI revised India’s Gross Domestic Growth (GDP) projection to 7 percent from 7.2 percent for the 2022-23 financial year in its latest review conducted in September. The International Monetary Fund (IMF) also downgraded India’s growth forecast to 6.8 percent for the same period.

However, the IMF still describes India as the “bright spot on a dark horizon” in view of recessionary risks in the EU because of inflationary pressure caused by high commodity prices.