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Business News/ Economy / Reserve Bank points to inflation risk, calls for fiscal measures
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Reserve Bank points to inflation risk, calls for fiscal measures

Inflation remains a key concern and constrains monetary policy from using the space available to act in support of growth, RBI said in its 2020-21 annual report

The monetary policy committee will meet between 2-4 June (Photo: Mint)Premium
The monetary policy committee will meet between 2-4 June (Photo: Mint)

The Reserve Bank of India (RBI) on Thursday said runaway price rise has crimped the space available for monetary policy to revive flagging economic growth and called for fiscal measures—the domain of governments—to try and curb supply-side inflation.

“Inflation remains a key concern and constrains monetary policy from using the space available to act in support of growth," RBI said in its 2020-21 annual report.

“Monetary policy will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability while continuing with the accommodative stance."

Supply-side inflation refers to price rise caused by shortages of goods.

The RBI warning follows cuts in India’s FY22 growth forecast by experts amid a rapidly spreading coronavirus pandemic. In April, the central bank estimated retail inflation at 5% in the fourth quarter of fiscal 2021; 5.2% in the first three months of FY22; 5.2% in the second quarter; 4.4% in the following three months; and 5.1% in the fourth quarter, with risks broadly balanced. It had also projected economic growth at 10.5% in FY22.

The monetary policy committee (MPC) will meet between 2-4 June and is expected to maintain the accommodative stance for the whole of 2021.

The statement comes a day after outgoing Confederation of Indian Industry chairman and Kotak Mahindra Bank chief executive Uday Kotak said in an interview that it was time RBI expanded its balance sheet in support of the economy.

Economists at Barclays said the MPC has no option but to stay accommodative even as it monitors incipient price pressures and keeps all rates on hold. Barclays said since 5 May, when RBI announced liquidity measures, India’s growth outlook has further degraded as inflation may remain persistent even in the second half of 2021.

The government has retained RBI’s flexible inflation target in the 2-6% band for the five years through 31 March 2026.

While inflation measured by the Wholesale Price Index softened in 2020-21, there was no pass-through to retail inflation. According to RBI, the substantial wedge between wholesale and retail inflation during the year pointed to the persistence of supply-side bottlenecks and higher retail margins, underscoring the importance of supply management. Meanwhile, RBI managed to repatriate nearly 1 trillion to the government after higher income from the sale of foreign exchange transactions and lower provision, according to the annual report.

RBI said the monetary policy in 2020-21 had to deal with the twin challenge of reviving growth from the ravages of covid and ensuring inflation eased from above the upper tolerance band. However, while the pace of economic recovery turned out to be faster than anticipated, RBI said the outlook is weighed down by uncertainties and would depend upon the evolving trajectory of infections and vaccinations.

“A durable recovery will be dependent on continued policy support," it said.

Starting fiscal 2021, RBI changed its accounting year from July-June to April-March. In the nine months ended 31 March, RBI saw a 69% increase in earnings from foreign exchange transactions to 50,629.18 crore from 29,993.22 crore a year ago.

The accounting change adopted in 2019, as per the recommendations of the Bimal Jalan Committee report, allows RBI to pass part of the profit made from selling foreign exchange to the government as a surplus.

From July 2020 to March 2021, RBI sold a total of $85.2 billion of its foreign exchange. Interestingly, much of the dollars were sold in the last two months of the accounting year, soon after the Budget.

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ABOUT THE AUTHOR
Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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Published: 27 May 2021, 11:50 PM IST
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