The Reserve Bank of India (RBI) on Monday said that the efforts to bring down retail inflation within its tolerance band will be tough and protracted owing to the lag effect of monetary policy. The focus of the monetary policy, however, will remain on bringing down retail inflation even as the metric continues to be above the mandated levels.

The RBI expects headline inflation to ease from its higher levels in September, on the back of easing momentum and favourable base effects. “Headline inflation is set to ease from its September high, albeit stubbornly,” the RBI wrote in an article titled “State of the Economy”, adding that the fight against inflation will be “dogged and prolonged”, given the long and variable lags with which monetary policy operates.

The first priority of the central bank is to bring the inflation within the band of ( /-) 2-6% and then lower it to around 4%. However, this trajectory will likely be gradual on account of the repeated shocks to the economy caused due to the geopolitical events and the pandemic. The RBI, in its monetary policy statement, has guided for 6.7% inflation in FY23, with 7.1% in Q2FY23, 6.5% in Q3FY23 and 5.8% in Q4FY23.

“The easing of inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports,” the central bank said in its October bulletin.

Yet, if we succeed, we will entrench India’s prospects as one of the fastest growing economies of the world enjoying a negative inflation differential with the rest of the world,” the central bank further said.

The CPI inflation rose to 7.41% in September from 7.0% in the previous month mainly due to rise in prices of some food categories such as cereals, milk and pulses. However, with the easing in WPI inflation to 10.70% in September from 12.41% in August and lower food prices, along with softening global commodity prices are likely to aid in bring down retail inflation, the RBI said.

Easing of price pressures will also enable to economy to recover, which is showing some sign of stress as seen in contraction in the index of industrial production (IIP), which contracted by 0.8% in August. The recovery in the economy will be driven by contact-intensive sectors, according to the central bank, as the hangover effects of the pandemic have waned and the festival season spending is already boosting consumption demand. The momentum of real gross domestic product (GDP) growth is expected to shed the drag embedded in the National Statistics Office’s (NSO) estimates for the first quarter of FY23 and move into positive territory in the remaining quarters, the RBI said. The NSO’s GDP estimates for Q1FY23 at 13.5% was lower than the RBI’s projection of 16.2% for the same period.