Retail inflation as measured by the consumer price index (CPI) stayed above the upper end of the MPC’s tolerance band of 4+/-2% for two consecutive months in 2022.
The Reserve Bank of India (RBI) does not expect inflation to remain above 6% for long, governor Shaktikanta Das said on Monday. Given the strength of its foreign exchange reserves, the Indian economy is at present better placed to weather the effects of a hike in US interest rates than it was during the taper tantrum of 2013, Das observed, speaking at the Confederation of Indian Industry’s (CII) national council meeting.
Das ruled out the possibility of the phenomenon of stagflation — low growth coupled with high inflation — playing out in India. “I can’t say any number today not just because of MPC (monetary policy committee) confidentiality issues but because those numbers are still on the drawing board. So, I don’t see inflation going up beyond 6%. In fact, our expectation was that it will moderate to 4.5%. Now, when we rework we will know where exactly we stand,” he said.
Retail inflation as measured by the consumer price index (CPI) stayed above the upper end of the MPC’s tolerance band of 4+/-2% for two consecutive months in 2022, clocking 6.01% in January and 6.07% in February.
“RBI continues to remain supportive of growth. We are conscious of our primary responsibility to maintain price stability and keep inflation under control,” Das said. “We will ensure abundant liquidity to meet the requirements of the productive sectors of the economy. Liquidity support of Rs 17 lakh crore was provided,” he added.
Das conceded that the volatility in crude prices resulting from the war between Russia and Ukraine could create difficulties for the rate-setting panel in their calculations and described the current situation as “unimaginably uncertain”.
While making calculations on inflation, the panel’s assumptions on crude and commodity prices are assumed to hold for 365 days. “We don’t know today whether crude oil will remain at $100 (per barrel) plus till March 2023,” Das said.
The MPC will spell out its inflation roadmap, expectations and estimations only during its next policy review in April, he said. However, the impact of the Ukraine crisis on the RBI’s growth projection of 8.9% for FY22 will be marginal, Das added.
He also defended the flexible inflation targeting framework and said that the central bank would not have had the flexibility to provide the benefits of an accommodative policy and other reliefs that it offered over the last two years, had the target been fixed at 4%.
The governor said that so far the RBI has resisted temptations to tighten its monetary policy stance as doing so could have led to demand compression. “The point is initiating a premature demand compression through monetary policy action would be counterproductive. Monetary policy addresses the demand side issues while supply side issues are dealt with by the government,” Das said.
He asserted that India’s foreign currency reserves of $677 billion and forward market assets worth $55 billion, which are all likely to come back in the months ahead, offer comfort to the economy at a time of policy tightening in Western economies. Though there could be some spillovers, the RBI will be able to maintain the stability of the Indian rupee. “Our standard policy is that we intervene to prevent excessive volatility,” Das said, adding that between April 1, 2021, and March 17, 2022, the rupee depreciation vis-à-vis the US dollar was 0.4%. Going forward, India’s forex reserves and its ability to finance the current account deficit (CAD) will help maintain the stability of the rupee.
The RBI is widely understood to have been intervening in the currency markets to help shore up the rupee amid rising geopolitical uncertainty and volatility in crude prices.
Das argued against touching the reserves to finance other needs of the economy. Stating that the reserves are held against the country’s liabilities, he warned against the risk of revaluation of assets. “That (reserves) represents the strength and stability of the economy and the exchange rate. Therefore, touching the reserves for financing various requirements of the economy is not at all advisable and they are not in the medium-term, forget long-term, interests of any government,” Das said.
