RBI avoids policy response to rising inflation to support economic recovery

The Reserve Bank of India raised inflation forecasts on the back of higher oil and other raw materials while it maintained the growth forecast at 9.5% for FY22 despite anemic investment demand.

Governor Shaktikanta Das said inflation measured by the consumer price index (CPI) might remain close to the upper tolerance band of 6% up to September expecting easing of pressure thereafter on kharif harvest arrivals.

The central bank projected CPI at 5.7% for FY22 compared to its earlier projection of 5.1%.

“The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy. A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions,” Das said.

The monetary policy committee (MPC) maintained its accommodative stance but it was not unanimous. One MPC member was against it possibly due to the sustained price pressure.

Headline CPI inflation rose 6.3% in May and remained static in June driven by a broad-based pick-up across all major groups on adverse supply shocks and spillovers from rising global commodity prices.

RBI projected CPI at 5.9% in the July-September period, while 5.3% and 5.8% for the following quarters. In the previous policy, it had projected CPI at 5.2%, 5.4% and 4.7% for respective quarters.

Crude oil prices are volatile with implications for imported cost pressures on inflation, RBI said. “The combination of elevated prices of industrial raw materials, high pump prices of petrol and diesel with their second-round effects, and logistics costs continue to impinge adversely on cost conditions for manufacturing and services, although weak demand conditions are tempering the pass-through to output prices and core inflation,” it added.

On economic growth, RBI is expecting a revival backed by improving capacity utilisation, rising steel consumption and higher imports of capital goods. “The congenial monetary and financial conditions and the economic packages announced by the central government are expected to kick-start a long-awaited revival,” Das said.

He mentioned that the central bank announced more than 100 measures to mitigate the impact of the pandemic.

The projection of real GDP growth is at 21.4% for the June quarter, while that for the following three quarters are 7.3%, 6.3% and 6.1%. Real GDP growth for the first quarter next fiscal is seen at 17.2%.

“Going forward, our endeavour would be to continue the monitoring of measures which are still in operation to ensure that the benefit of all our measures percolate down to targeted stakeholders,” the governor said.



Source link

Leave a comment