The use of variable reverse repo rate should not be construed as liquidity tightening and RBI will remain in the liquidity surplus mode, Patra said
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The Reserve Bank of India (RBI) will gradually wind down its accommodative monetary policy stance, as it expects inflation to moderate to 4% by 2023-24, RBI deputy governor Michael Patra said on Thursday at an event organized by the Confederation of Indian Industry (CII). Inflation should moderate to 5.7% or lower in FY22 and below 5% in FY23, Patra said. “Signals of the latter will be conveyed through the stance articulated by the monetary policy committee (MPC) in its future resolutions. We don’t like tantrums. We like tepid and transparent transitions, glide paths rather than crash landings," he said.
Credit pick-up will be RBI’s preferred mode for narrowing liquidity surplus, according to Patra. The central bank is absorbing more than ₹9 trillion per day through the reverse repo corridor as bank credit continues to grow at a sluggish pace of 6%.
The use of variable reverse repo rate should not be construed as liquidity tightening and RBI will remain in the liquidity surplus mode, the deputy governor said. “It is our hope that credit demand will recover and banks will get back to their core function as financial intermediation as soon as they can. This is the natural and RBI’s preferred manner in which surpluses in the LAF (liquidity adjustment facility) can be reduced," he said.
RBI’s decision to create an ‘asymmetrical liquidity corridor’ by cutting the reverse repo rate was a measure to counter the impact of the pandemic, and will be normalized as time passes, Patra contended. That said, he made it clear that there is a need to maintain the accommodative monetary policy stance to sustain growth, while keeping inflation within the target range.
MPC is committed to its mandate of price stability and the current inflationary pressures are primarily driven by supply shocks, Patra reiterated. “Although shocks of this type are typically transitory, the repetitive incidence of shocks is giving inflation a persistent character," he said. “Contributions to inflation are emanating from a narrow group of goods, items constituting around 20% of consumer price index are responsible for more than 50% of inflation. The analysis of inflation dynamics indicates that easing of headline inflation from current levels is likely to be grudging and uneven."