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    Das refutes perception that RBI has fallen behind the curve


    Reserve Bank of India Governor Shaktikanta Das, on Friday, refuted the perception in certain quaters that the central bank has fallen behind the curve when it comes to monetary policy action, stating that had the rates been been hiked three or four months earlier, it would have impacted growth in FY22.

    The Monetary Policy Committee (MPC) had upped the policy repo rate in an offcyle meeting in early May from 4 per cent to 4.40 per cent. Subsequently, earlier this month, the rate was increased from 4.40 per cent to 4.90 per cent.

    “I truly and sincerely believe that the RBI is in sync with the requirements of the economy; that the RBI is in sync with the trend of economic developments and the process of recovery and whatever you call ‘the curve’. We are very much in sync with the requirements,” said Das at a BFSI summit..

    The Governor noted that from September-October 2021 onwards, the RBI focussed on withdrawal of liquidity, and it was watching the revival of economic activity and growth.

    “In fact, in one of my monetary policy statements, I had said, ‘when the shore is visible, why rock the boat? Let us first reach the shores safely’. So, our focus was to ensure that the economy reaches a stage where we can pull out the support in terms of liquidity and lower interest rates, which we had given to deal with the fallout of the pandemic.

    “So, we wanted growth to reach a particular level where we were comfortable that it was stable,” said Das.

    On retail inflation

    On questions being raised about RBI’s retail inflation projection (made in February) for FY23 of 4.5 per cent being very optimistic, the Governor said: “Now, I will tell you why it [the projection] was not optimistic. I’m not being defensive. I’m just stating the facts.

    “The professional forecasters’ conclusion was, it [retail inflation] was going to be 5 per cent. We had done our internal analysis (in fact, at that time we had assumed the crude oil prices to be $80 per barrel). Internally, we did analysis if the crude oil price was to touch $90, $95 or $100 per barrel, even then we found that the inflation will be about 5 or 5.2 per cent.”

    So, the RBI took a conscious call to tolerate relatively higher retail inflation for a little more time, wait for FY22 to end, see what has been the outcome of two years of support, get a quick sense out it by March-end, and then act.

    “So, therefore, on reaching March-end, we concluded that activities and GDP size and growth had exceeded the pre-pandemic (FY20) level. So, we decided it was now time to focus more on inflation.

    “And, therefore, in the April 2022 policy we introduced SDF (Standing Deposit Facility) at a higher rate (it was 40 basis points higher than the reverse repo rate of 3.35 per cent). We changed our inflation projections. We very clearly came out with the policy statement that from now on, in the sequence of priorities, inflation takes priority over growth,” explained Das.

    The RBI got a sense that the April inflation reading is going to be much more than expected.

    “And, in the meantime, the war started. Now, the war came without any forward guidance or advance notice. Nobody knew that the war will start….nobody expected a full-fledged war and its consequences.

    “In April, we knew that the war is going to cause damage. We came out with about five or six measures — we introduced SDF at a higher rate of 3.75 per cent, which had the effect of pushing up the overnight call money rate, which is the primary instrument of monetary policy; we changed our focus to inflation; we revised our inflation projections,” said the Governor.

    Das emphasised that on top of a 40 basis points rate hike through the SDF, the MPC did not want to add another 40 or 50 basis points of rate hike in the April policy because the shock would have been too much.

    “The shock that the war gave had to be dealt with in a calibrated manner. Just as the shock which Covid gave to our economy and financial markets had to be dealt with in a calibrated manner, the shock of the war had to be also dealt with in a calibrated manner so that it is well absorbed by the players, the businesses, the financial sector and the lenders,” said the Governor.

    So, the MPC had a calibrated path and therefore it held an offcycle meeting in May. Now, the growth numbers for FY22 are about 1.5 per cent higher than 2019-20 level.

    “So, I feel that we are very much in line with the requirements of the time. The RBI has acted proactively. And, I would not agree with any perception or any sort of description that the RBI has fallen behind the curve.

    “Just imagine if we had started increasing the rates early, what would have happened to growth in FY22.

    “Rhetorically, i can say that could it have prevented the spike in inflation which has now been caused by the war? No, inflation would still be at 7 per cent…,” said Das.

    Published on June 17, 2022

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