The Reserve Bank of India’s Monetary Policy Committee on Friday raised its estimate for inflation in FY23 to 5.7%, from the 4.5% forecast in February before Russia invaded Ukraine, and stressed that it would now focus on the “withdrawal of accommodation to ensure that inflation remains within the target going forward”.
“In the sequence of priority we have now put inflation before growth,” RBI governor Shaktikanta Das said at a press conference after announcing the MPC’s decision to hold interest rates at its first monetary policy review of the new fiscal year. “For last three years growth was ahead of inflation in sequence. This time we have reversed it because we thought the time is appropriate,” he added.
Similarly, the RBI has started withdrawing some of the accommodation it had provided in the last two years as it is headed towards normalcy, though gradually.
“The stance continues to be accommodative but we are now focussing on withdrawal of accommodation. So, gradually we are moving away from an ‘accommodative’ stance which has been there for more than two years,” Mr. Das said.
The central bank had shifted from a ‘neutral’ to an ‘accommodative’ stance In the middle of 2019.
Elaborating on the change in tack, RBI Deputy Governor Michael Debabrata Patra said, “We have taken the policy repo rate to an all-time low which is 4%. If you adjust it with the targeted inflation then the real rate is zero. That was ultra accommodation. The situation is changing and now we want to withdraw the ultra accommodation but there is scope to remain accommodative.”
Mr. Das explained that the MPC had decided to revise the inflation projections for FY23 upwards with the estimate for Q1 at 6.3%; Q2 at 5.8%; Q3 at 5.4%; and Q4 at 5.1% due to “war-induced factors”.
Mr. Das pointed to the sharp increase in crude oil, edible oil and wheat prices, and the cost of feed - which has pushed prices of poultry, egg and dairy products - as the reason for the higher estimates.
Earlier in the day, the MPC, based on an assessment of the macroeconomic situation and the outlook, voted unanimously to keep the policy repo rate unchanged at 4%.
In his statement, Mr. Das said even as the horizon was brightening, escalating geopolitical tensions had cast a shadow on India’s economic outlook.
As a result, real GDP growth for FY23 has been projected lower at 7.2%, compared with the 7.8% estimated earlier. RBI’s quarter-wise forecast is: Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; and Q4 at 4%, assuming crude oil (Indian basket) averages at $100 per barrel during FY23.
“Given the excess volatility in global crude oil prices since late February and the extreme uncertainty over the evolving geopolitical tensions, any projection of growth and inflation is fraught with risk and is largely contingent upon future oil and commodity price developments,” Mr. Das observed.
“The Reserve Bank will use all its policy levers to preserve microeconomic stability and enhance the resilience of our economy,” he asserted.
“The situation is dynamic and fast changing and our actions have to be tailored accordingly,” he added.
Asked about the likely impact of any economic fallout due to the ongoing trade between India and Russia, which is facing sanctions from western nations following its invasion of Ukraine, Mr. Das said, “The government is seized of the issue and will deal with it. As far as RBI is concerned, we will not do anything that goes against the sanctions.”
“The war has disrupted trade payments,” Deputy Governor T. Rabi Sankar noted. “We are discussing with all stakeholders and we are sensitive to sanctions,” he added.
“While the pandemic quickly morphed from a health crisis to one of life and livelihood, the conflict in Europe has the potential to derail the global economy,” Mr. Das earlier observed in his statement. ”Caught in the cross-current of multiple headwinds, our approach needs to be cautious but proactive in mitigating the adverse impact on India’s growth, inflation and financial conditions,” he added.
“We are, however, reassured by the strong buffers that we have built over the past few years, including large foreign exchange reserves, significant improvement in external sector indicators and substantial strengthening of the financial sector, all of which would help us to weather this storm. Once again, we in the RBI stand resolute and in readiness to defend the economy and navigate out of the current storm,” the central bank chief said.