Balance between growth and inflation is unsettled, says RBI Governor Das

The five observations 

The MPC (Monetary Policy Committee) remains committed to restoring the balance between inflation and growth, which has got unsettled recently. 

The Reserve Bank will use its various policy instruments to create the conditions for restoring the inflation growth balance. The credibility of the flexible inflation targeting framework needs to be reserved.

Inflation has to be brought down in the interest of sustainable growth. 

Prudence, practicality and timing will continue to be the guiding principles for the Reserve Bank’s future actions. Timing of actions is the key. 

On RBI’s growth projections for FY25 coming down sharply from 7.2% to 6.6% and inflation projection raised. Is India now in a stagflationary phase? 

There is a slowdown in GDP growth in the second quarter due to a special set of factors. Now, it’s not appropriate to make a judgment on the trend rate on one data point. So, what was expressed as 8% was not a trend. It was just the average from 21 to 24. And all over the world, for every country, the projections that are being made for 25 and 26 are implicitly correcting cyclically for the rebound from the pandemic, for all countries in the world. So, even when we made our initial projections, they were not at 8%, they were 7.2%. And also, in the monetary policy report, we gave a projection for 20, which was the same cyclical correction, after which, after this correction is over, it will revert back to a trend, and we are yet to see the data points of that trend.

Now, if you see the second half of the year’s projections, there is a reversion back towards an upper rate of growth, 6.9%, 7.3%, and that continues into 26. So, we are hopeful that we will reach that level again.

On CRR cut, currency circulation and tight liquidity  

In the next few months, we expect tight liquidity. We expect the tax-related outflows from the system, both direct tax in the middle of December and thereafter the GST. Together with that, there is a possibility of likelihood of increase in currency in circulation because the busy credit season, agricultural activity has now picked up and that requires cash. That will overlap into the harvest season also, which requires cash. So, the currency in circulation is also likely to go up. And then, there have been significant amount of capital outflows in the months of October and November. Outflow forex has happened because of FPI’s exiting. Our assessment is that liquidity conditions will remain tight. 

And let us also bear in mind the fact that the CRR increase was done sometime back, it was a temporary measure. It has served its purpose. It was time to normalise it. 

On dynamics between growth and inflation 

Now the balance is unsettled. Last time we had said that growth-inflation balance was well poised. Well poised means the growth looked good for that quarter as well as for the whole year. Inflation outlook also, we were aware that September and October inflation prints will be higher. But as you know, September and October, because of weather factor and other factors food inflation went up very steeply.

September numbers were broadly a little higher than what we had estimated.

October also we had expected it to be high, but the actual number came little higher than what we had estimated. So therefore, inflation was more than what we had expected, little more. And growth also has moderated the numbers. We have given the numbers. So, the well poised character of the dynamics between growth and inflation, that has got somewhat unsettled. Our effort is now to restore that balance, which basically means that we want inflation to be brought down closer to the target. We want growth also to pick up. And I think our estimates, our assessment also shows that growth is picking up. So, we have to be very watchful. We have to maintain that balance between growth and inflation. 

On any discussion with the Government to delink food inflation from inflation-targeting framework 

I cannot share what discussions happen with the government. We are in regular internal discussions with the government regarding inflation. I would like to bring it to your attention that I have explained it detail about why headline inflation is targeted and why food inflation needs to be targeted. Headline inflation is our target according to the RBI Act provisions. We cannot target core, or food or fuel according to out whims. We are following the RBI Act”

(Michael Patra) The difference between GDP growth estimate and the data

There is a lot of commentary on that already in the in the press. If you look at the demand side, the main problem is investment. On the supply side, the main problem is manufacturing and the two worlds intertwined. In manufacturing, the the biggest issue is the slump in the sales growth and that is reflecting inflation hitting the urban consumer. So, when sales growth is down, companies do not want to invest in new assets because they see demand as moderate and it can be met from existing capacity since they don’t want to engage in new. Integration investment is down, so the underlying slowdown in growth is beautiful because of inflation.

SORR and draft guidelines 

So as of now, we have two benchmarks set out by the Financial Benchmarks India Ltd. One is the MIBOR which concerns uncollateralised transactions and we have the MROR (Market Repo Overnight Rate) which is based on the market repo. But the TREPS (treasury bill repurchase) which is 60% of the market is not in that index. So this Index that we will have now will capture all secure transactions. That’s the limit.

Tariff war 

And lastly. Hypothetically, if it happens, will not be an isolated event. There will be other events around it like for instance, they say, that perhaps, China may react by devaluing the currency or they might be retaliatory tariffs. So, at this point, it is very difficult to say what will be our unilateral move and unilateral effect. Let us wait for the equilibrium, general equilibrium it is..

Published - December 06, 2024 09:04 pm IST