Inflation to align to the 4 percent target by FY'25-26: Michael Patra

Inflation is expected to be aligned with the target of 4 percent on a durable basis in the coming fiscal according to Reserve Bank deputy governor Michael Patra . He also highlighted the future challenge to the conduct of monetary policy arising from climate change and digitisation.

“In July and August 2024, inflation has fallen below the target. It is projected to average 4.5 per cent in 2024-25 before aligning with the target on a durable basis in 2025-26” Patra said in a speech on “Assessing Inflation Targeting” at a conference organised by the central bank in New Delhi.

Summarising the trend since the Pandemic, Patra said that Inflation breached the upper tolerance band in many months during 2020–21 and 2021-22. By April 2022, it reached a peak of 7.8 per cent. The monetary policy response was front-loaded with a cumulative hike of 250 bps during May 2022-February 2023

In India which has adopted flexible inflation targeting as its monetary policy goal, repetitive shocks to food and fuel prices challenged the conduct of monetary policy. In India, price stability is a shared responsibility under which the government sets the target, and the central bank achieves it. “ This allows monetary-fiscal coordination without posing risks to financial stability, fiscal consolidation or growth”

Going ahead, climate change could pose a challenge to the conduct of mmoetary policy. “Central banks face an existential threat to their central mandates from climate change through supply shocks such as food and energy shortages and through a decline in productive capacity which can translate to inflation volatility” Patra said.

Besides, innovations in payment systems, fintech, and central bank digital currencies can also change the nature of policy trade-offs facing inflation targeting in the future. “ Digitalisation can directly lower inflation rates through a decline in the prices of information and communication technology -related goods” Patra said. “Digital technologies can also influence inflation indirectly through changes in firms’ price-setting behaviour and market dynamics, with competition enabled by e-commerce ”.