The comments came after the RBI’s Monetary Policy Committee (MPC) left the key policy rates unchanged for the ninth time in a row.
The repo rate was left at 4 per cent, which was on expected lines, while the reverse repo, which has been the effective policy rate since the pandemic hit in March 2020, was surprisingly kept unchanged at 3.35 per cent despite the central bank preparing the market for a much-needed and delayed rebalancing of the liquidity overdose for quite sometime now.
The policy move was predicated on the belief that if the Omicron variant of the coronavirus triggers a third wave of the pandemic in India, it can easily upend the fledgling recovery.
Retail inflation is likely to ease to around 5 per cent next fiscal on the back of government measures to ease supplies, reduction in fuel prices and prospects of good crops, Das said.
For FY22, retail inflation is pegged at 5.3 per cent and should inch down to 4 – 4.3 per cent by end-FY23.
Reduction in excise duty and VAT on petrol and diesel will bring about a “durable reduction in inflation” by way of direct effect as well as indirect effect through lower transportation cost, Das observed.
Despite sounding cautious about the possible impact of the Omicron variant, the central bank chose to keep its growth forecast unchanged at 9.5 per cent for the current fiscal (6.6 per cent in Q3 and 6 per cent in Q4).
However, it added that recovery is not yet strong enough to be self-sustaining as activities of only a few key sectors have reached pre-pandemic levels, while the more important consumer demand and private capex are still a far cry.
Addressing reporters at the customary post-policy presser, Das elaborated, “Our overarching priority and focus now is supporting growth and reviving growth, but maintaining price stability is also our concern along with financial stability as we are an inflation-targeting central bank.”
While activities of various sectors have crossed pre-pandemic levels, some segments like private consumption and investment are still lagging, Das said.
He admitted that the economy is facing several challenges in terms of market volatility, rising crude oil and commodity prices and supply side disruptions like container and chips shortages. “And we’ve factored in all these while remaining accommodative in our policy stance.”
On whether the RBI is risking losing its inflation fight as it continues to provide liquidity to an already fund-flushed market, Das said looking at the surging inflation in various major advanced economies amid the Omicron threat, “being cautious was the best option left for us.”
On why the RBI continues to keep the standing deposit facility (SDF) to manage liquidity while using the variable reverse repo repurchases or VRRRs, deputy governor and head of the monetary policy department Michael D Patra said SDF will be used when needed as RBI has several tools in its arsenal.
So we chose VRRRs as that is more market friendly than SDF, he added.
Patra further said anchoring inflation to a certain target is important for inclusive growth, and that the monetary policy, which is focused on medium to long-term outcomes and not the immediate impact, has to choose the correct metric for inflation.
The RBI has chosen headline retail inflation and it is likely to fall to 4 – 4.3 per cent by the end of next fiscal. “This gives us more leeway to support growth now,” he noted.
On whether the RBI has been ultra-dovish, Das and Patra said it was not correct to compare India’s inflation dynamics with those of advanced countries.
Das added that “we are fully mindful of and aware and conscious of the complexities of our job… we are an inflation-targeting central bank and we are fully mindful of and cognizant of how important it is for us to maintain price stability along with financial stability, and also supporting growth.”
Patra said the much-dreaded supply chain bottlenecks are slowly unclogging and the new thinking is that today’s surpluses will soon be tomorrow’s shortages and vice versa when everything settles down.
The RBI is rooting for growth now because the economy is getting into a stable inflation level of 4 – 4.3 per cent by end-FY23, which gives it more space to support growth, Patra said.