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The Reserve Bank of India (RBI) governor Shaktikanta Das expects the country's CPI inflation to remain higher than its upper tolerance of 6% till December 2022-end. Inflation is expected to go below 6% only in the fourth quarter of FY23, in line with RBI's projection.
"Inflation has now become broad-based and that is the issue which we are now addressing through our actions," Das said in an interview with The Times of India on Friday.
When asked why the repo rate wasn't hiked earlier, Das said, "before we increased the repo rate in May and June and the cash reserve ratio in May, we had been taking measures to rebalance liquidity through VRRRs, roll back the expansion of our balance sheet and the liquidity infusion related to the pandemic. In our April 2022 policy, we sent out a clear message by prioritising inflation over growth."
He added, "We introduced the Standing Deposit Facility at a rate that was 40 basis points (100bps = 1 percentage point) higher than the reverse repo rate. Consequently, the overnight call rate – which is the operating target of monetary policy – moved up in tandem."
Das highlighted that in January last year, RBI resumed its liquidity management framework, which was kept in abeyance because of the pandemic. Further, the government security acquisition programmes (GSAP and GSAP 2.0) which were announced during the pandemic, were discontinued from October 2021.
"Advanced economies are still tapering their asset purchase programmes," he said.
According to Das, the idea behind these steps was to take out liquidity from the system in a very gradual and orderly manner. He added, "Unless you take out excess liquidity, overnight call rates will not respond to rate hikes and will remain lower. So, you have to deal with the problem of excess liquidity first."
"We are well on track to bring down inflation and inflation expectations," the RBI governor said.
He added, "until December, CPI inflation is expected to remain higher than the upper tolerance level; thereafter it is expected to go below 6% as per our current projections. there will be inflationary pressures, and only in the fourth quarter, we have projected it to go below 6%."
Talking about the supply side factors pushing inflation higher, the RBI governor said, it has "driven the current inflation; nonetheless, monetary policy plays an important role when inflation rises. Household inflation expectations are backward-looking."
Further, he said, "They go by the current state of affairs and look at what it was two or three months earlier and their expectations are accordingly conditioned about future inflation. Inflation expectations influence not only households but also businesses and drive up the pricing of food, manufactured goods, and services. If they expect inflation to be high, even companies will defer their investment plans."
"When the central bank communicates that it is focused on inflation and takes steps in that direction, it gives confidence and a clear message to households and businesses. This will anchor inflation expectations and contain the second-round effects of supply shocks. Eventually, the core and headline inflation can moderate," he said.
In June 2022 policy, on the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of US$ 105 per barrel, RBI has projected inflation at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced.
