Home > News > India > RBI: Inflation outlook highly uncertain, growth remains a concern
RBI governor Shaktikanta Das,
RBI governor Shaktikanta Das,

RBI: Inflation outlook highly uncertain, growth remains a concern

  • RBI's rate-setting committee believes that the supply shock to food prices in April may persist over the next few months
  • Given the uncertainties, GDP growth in 2021 is estimated to remain in the negative territory

MUMBAI: India’s inflation outlook is highly uncertain at the moment and forecasting it has become complicated due to partial release of data by the National Statistical Office (NSO), said Reserve Bank of India (RBI) governor Shaktikanta Das on Friday. More worrisome, however, is the risk to India's economic growth, the governor said.

The monetary policy committee, Das said, is of the view that headline inflation may remain firm in the first half of FY21 but should ease in the second half aided by favourable base effect. By Q3 and Q4 of the current fiscal, the MPC expects headline inflation to fall below the target of 4%.

“Thus, the forward guidance of the MPC is directional rather than in terms of levels. Going forward as and when more data are available, it should be possible to estimate the path of inflation with greater certainty," Das said.

He said guiding for inflation has become complicated because of the release of partial information on the consumer price index (CPI) by the NSO, hindering a comprehensive assessment of price situation.

“From the incomplete data that have been made available, food inflation which had eased from its January 2020 peak for the next two months, now suddenly has surged to 8.6% in April," said Das.

The central bank’s rate-setting committee believes that the supply shock to food prices in April may persist over the next few months, depending on the state of lockdown and the time taken to restore the supply chains once curbs are lifted. Among the pressure points, Das said, the elevated levels of pulses inflation are worrisome and warrants timely and swift supply side interventions including a reappraisal of the import duties.

“Immediate step up of the open market sale, public distribution system (PDS) offtake by the Food Corporation of India (FCI) to offload some parts of excess stock can also cool down cereal prices and also create room for rabi procurement," said Das.

However, the governor cautioned that the MPC believes that the risks to growth are the gravest. The combined impact of demand compression and supply disruption will depress economic activity in the first half of the year, he said.

“Assuming that economic activity gets restored in a phased manner, especially in the second half of the year and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken, both by the government and the RBI would create conditions for a gradual revival in activities in the second half of FY21," said Das.

But there are downside risks to this assessment and is contingent upon the containment of the pandemic and quick phasing out of social distancing and lockdowns.

“Given all these uncertainties, gross domestic product (GDP) growth in 2021 is estimated to remain in the negative territory, with some pickup in growth impulses in the second half of FY21 onwards," said Das.

To help mitigate the impact of the pandemic-induced lockdown and revive the economy, the RBI today cut repo rate by 40 basis points to 4% from 4.40% and reverse repo by as much to 3.35% from 3.75%.

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaper Livemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

Close
×
My Reads Logout