India was relatively better placed than other nations to weather the storm associated with monetary tightening in advanced economies, the ongoing geopolitical conflict, lockdowns in parts of China and supply-side disruptions, it added.
The ministry said while the inflation is expected to be elevated in 2022-23, mitigating action taken by the government and RBI may reduce its duration. “The RBI has signalled its determination to combat inflation and that too will sustain macroeconomic stability and growth,” the ministry said.
It pointed out that rising food and energy prices were a global phenomenon and several advanced nations had higher inflation rates than India.
Retail inflation has been trending above RBI’s upper tolerance level of 6% for the past three months with the April print coming in at a eight-year high of 7.8% on Thursday.
RBI in an off-cycle announcement earlier this month raised key repo rate by 40 basis points to 4.40% to tame inflation. This was the first rate hike since August 2018.
The finance ministry said while high imports, elevated global crude and edible oil prices have a significant impact on India’s inflation outlook, inflation had a lesser impact on low-income strata than on high-income groups, as suggested by the consumption pattern.
It added that since aggregate demand was recovering only gradually, the risk of sustained high inflation was low.
Seen over a longer time horizon, it said, inflation in India’s economy has not been as much a challenge as is sensed from month-to-month changes.
The ministry said rural incomes will be further boosted by agricultural exports as it registers an impressive YoY growth of 19.9% in April, despite facing logistic challenges like high freight rates and container shortages.
The report added that anticipation of a rate hike by the US Federal Reserve and central banks of other developed countries had caused the yields on both government securities and corporate bonds to rise in April 2022.
The ministry said India’s forex reserves stood at a comfortable $597.7 billion, providing an import cover of about 11 months for financing investment and consumption, despite pressure from outflow of Foreign Portfolio Investments (FPI).
“The (forex) reserves have been steadily declining under pressure from outflow of Foreign Portfolio Investments (FPI) responding to monetary tightening by central banks in advanced economies. The quantum of outflow in April was however much lower than in the preceding three months,” the ministry said.
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