Retail inflation, as measured by the Consumer Price Index (CPI), remained above the top end of the MPC’s 4+/-2% tolerance range for two consecutive months in 2022.

The Reserve Bank of India (RBI) does not expect inflation to remain above 6% for long, Governor Shaktikanta Das said Monday. Given the strength of its foreign exchange reserves, the Indian economy is currently in a better position to weather the effects of a rise in US interest rates than it was during the taper tantrum of 2013, Das noted, speaking to the Confederation of Indian Industry’s (CII) National council meeting.

Das ruled out the possibility that the phenomenon of stagflation – low growth coupled with high inflation – could occur in India. “I cannot give a figure today, not only because of the confidentiality issues of MPC (Monetary Policy Committee), but also because those figures are still on the drawing board. So I don’t see inflation rising beyond 6%. In fact, our expectation was that it will moderate to 4.5%. Now, when we rework, we’ll know exactly where we stand,” he said.

Retail inflation, as measured by the Consumer Price Index (CPI), remained above the top of the MPC’s 4+/-2% tolerance margin for two consecutive months in 2022, clocking in at 6.01% in January and 6.07. % in February.

“RBI continues to support growth. We are aware of our primary responsibility to maintain price stability and control inflation,” Das said. “We will provide abundant liquidity to meet the demands of the productive sectors of the economy. Liquidity support of Rs 17 lakh crore was provided,” he added.

Das admitted that the volatility in crude prices resulting from the war between Russia and Ukraine could pose difficulties for the rate-setting panel in their calculations and described the current situation as “unimaginably uncertain”.

When making inflation calculations, it is assumed that the panel’s assumptions about crude oil and commodity prices will hold for 365 days. “We don’t know today whether crude oil will remain at $100 (per barrel) plus until March 2023,” Das said.

The MPC will not outline its roadmap, expectations and estimates for inflation until its next policy review in April, he said. However, the impact of the crisis in Ukraine on the RBI’s 8.9% growth forecast for FY22 will be marginal, Das added.

He also defended the flexible inflation targeting framework, saying the central bank would not have had the flexibility to provide the benefits of accommodative policies and other reliefs it had offered over the past two years if the target had been set at 4%.

The governor said the RBI has so far resisted the temptation to tighten its monetary policy stance as it could have led to a compression in demand. “The point is that initiating a premature compression of demand through monetary policy measures would be counterproductive. Monetary policy focuses on the demand-side problems, while the supply-side problems are dealt with by the government,” Das said.

He claimed that India’s $677 billion foreign exchange reserves and $55 billion futures market assets, all of which are likely to bounce back in the coming months, provide comfort to the economy at a time of policy tightening in Western economies. While there could be some spillovers, the RBI will be able to maintain the stability of the Indian rupee. “Our default policy is to intervene to avoid excessive volatility,” Das said, adding that between April 1, 2021 and March 17, 2022, the depreciation of the rupee against the US dollar was 0.4%. Going forward, India’s forex reserves and its ability to fund the current account deficit (CAD) will help maintain the stability of the rupee.

It is widely believed that the RBI has intervened in foreign exchange markets to help support the rupee amid mounting geopolitical uncertainty and volatility in crude oil prices.

Das argued against touching the reserves to finance other needs of the economy. He stated that the reserves are held against the country’s liabilities and warned of the risk of asset revaluation. “That (reserves) represents the strength and stability of the economy and the exchange rate. Therefore, it is not at all advisable to touch the reserves for financing various needs of the economy and they are in the medium term, forget the long term, not of a government,” said Das.

This post RBI Governor Shaktikanta Das says inflation over 6% is transient; expect the rupee to remain stable

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