Mumbai: Indicating a gradual approach to normalisation of policy, Reserve Bank of India (RBI) deputy governor Michael Patra said on Thursday that inflation is expected to ease to 4% — the lower end of its tolerance band — only by FY24.
Assuaging markets on the RBI’s continued accommodative stance, Patra said that the stance of “as long as necessary” accommodation is reflected in ample liquidity in the system, with net surpluses of close to Rs 9 lakh crore being absorbed by the central bank on a daily basis.
Patra was speaking at the 12th edition of the Financial Markets Summit organised by industry body CII. “The envisaged glide path should take inflation down to 5.7% or lower in FY22, to below 5% in FY23 and closer to the target of 4% by FY24. The rebalancing of liquidity conditions will dovetail into this glide path, but the choice of instruments is best left to the judgment of the RBI with its considerable experience with such tapers,” said Patra.
“Markets are, however, constantly reassessing this stance with incoming data and seek definitive reassurance on the future course of policy,” said Patra. “We don’t like tantrums. We like tepid and transparent transitions — glide paths rather than crash landings,” Patra said. He said that it would be wrong to mistake the central bank’s variable rate repo auction as a liquidity-tightening measure pointing to the surplus funds in the money market.
Patra said that the Indian economy is emerging from the second wave in a more resilient manner as compared with the first. He added that the recovery was more broad-based around manufacturing as a pivot, though output is still below pre-pandemic levels. “GDP outcome for the first quarter coming in just a shade below the RBI’s forecast, the projection of growth of 9.5% for the year as a whole appears to be on track,” said Patra.
Vindicating the RBI’s stance to look through price spikes, Patra said that inflationary pressures are largely driven by supply shocks. Although shocks of this type are typically transitory, the repetitive incidence of shocks is “giving inflation a persistent character”. According to Patra, the essence of India’s flexible interest rate-targeting policy was to protect growth by minimising the sacrifice of output, which is the “price” of price stability. “Symmetrically, FIT (flexible inflation targetting) also protects the economy from deflation by adopting a positive — rather than zero — lower bound,” he said.
Besides the dual target of price stability and growth, Patra said that in India the monetary policy target is defined in averages rather than as a point. Also, the inflation target is set to be achieved over a period of time rather than continuously. Patra said that there is a reasonably wide tolerance band around the target to accommodate measurement issues, forecast errors, supply shocks and, as vividly demonstrated recently, black swan events like the pandemic. Also in India, the MPC’s failure is defined as three consecutive quarters of deviation of inflation from the tolerance band, rather than every deviation from the target.Internet Explorer Channel Network