Spike in India inflation vindicates rate-setters’ hawkish stance, central bank says

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A spike in inflation in June justifies the decision of Indian policymakers to maintain higher rates for longer, the country’s central bank said in a report.

After moderating for four months, consumer price inflation accelerated to 4.81% in June because of a jump in food prices, “corroborating the monetary policy committee’s view that the fight against inflation is far from over and monetary policy has to stay the course on the arduous last leg of the journey to align inflation with the target,” the Reserve Bank of India said in its monthly State of the Economy report.

The spike led economists to raise their inflation forecasts, expecting slim chances of rate cuts this year. India’s central bank has raised its benchmark policy rate by 250 basis points since May 2022 but paused in April and June. The pauses were not a pivot toward rate easing, Reserve Bank of India Governor Shaktikanta Das had said.

In a separate article in the monthly bulletin, RBI Deputy Governor Michael Patra said forward guidance about monetary policy in a tightening phase “progressively loses potency as the policy rate rises from highly accommodative levels.”

In its report, the RBI said that developing the country’s manufacturing base will improve jobs and livelihoods but that boosting labor participation will require providing training and skills. India’s savings rate is “likely to increase with rising employment and deepening financial development,” it said.

India aims to raise the share of manufacturing from 17% of gross domestic product to at least 25% over a decade.