The RBI’s Monetary Policy Committee (MPC) on Thursday kept policy interest rates unchanged and by a 5-1 majority voted to continue the ‘accommodative’ stance as long as necessary to revive and sustain growth on a durable basis while ensuring that inflation remains within the target going forward.
Flagging potential downside risks from the “highly contagious Omicron variant”, the MPC noted there had been some loss of momentum in economic activity as reflected in high frequency indicators.
“The demand for contact-intensive services is still muted,” Governor Shaktikanta Das said in his statement adding, “MPC also noted that consumer price inflation has edged higher since its last meeting, but largely along anticipated lines”. Also, while core inflation remained elevated, demand-pull pressures were still muted, Mr. Das added.
“The renewed surge in international crude oil prices, however, needs close monitoring,” he said. Stating that headline inflation would peak in the current quarter within the tolerance band and then moderate closer to target in the second half of 2022-23, he said this had provided room for policy to remain accommodative.
“At the same time, output is just barely above its pre-pandemic level, while private consumption is still lagging. Global headwinds are accentuating,” he said. Taking into consideration the outlook for inflation and growth, in particular the comfort provided by the improving inflation outlook, the uncertainties related to Omicron and global spillovers, the MPC was of the view that continued policy support is warranted for a durable and broad-based recovery,” he stressed.
Observing that there was some loss of the momentum of near-term growth while global factors were turning adverse, Mr. Das said: “Looking ahead, domestic growth drivers are gradually improving. Considering all these factors, real GDP growth is projected at 7.8% for 2022-23 with Q1 at 17.2%, Q2 at 7%, Q3 at 4.3%, and Q4 at 4.5%”.
Emphasising that core inflation remained elevated at tolerance testing levels, although the continuing pass through of fuel tax cuts would help to moderate input cost pressures, Mr. Das said, “CPI reading for January 2022 is expected to move closer to the upper tolerance band, largely due to adverse base effects.” The CPI inflation for 2022-23 is projected at 4.5% with Q1 at 4.9%, Q2 at 5%, Q3 at 4% and Q4 at 4.2%, with risks broadly balanced, he said. “At the current juncture, the conduct of domestic monetary policy is primarily attuned to the evolving inflation and growth dynamics even as we remain watchful of spillovers from the uncertain global developments and divergent monetary policy responses,” he said.
“Our monetary policy would continue to be guided by its primary mandate of price stability over the medium term, while also ensuring a strong and sustained economic recovery,” he added. “As stated by me earlier, our actions will be calibrated and well-telegraphed,” he said.
The RBI had accorded the highest priority to preserving financial stability by taking quick and decisive steps to ease liquidity constraints, restore market confidence and prevent contagion to other segments of the financial market.
Pointing out that the balance sheets of Scheduled Commercial Banks (SCBs) were relatively stronger he said, “We have to be, however, watchful of the impact of the pandemic on the banking and NBFC sectors when the effects of regulatory reliefs and resolutions fully work their way through.” Since the virus was still active, Mr. Das urged people not to lose confidence and optimism. “As the great Lata Mangeshkar — whom we lost recently — sang in her immortal voice: “ Aaj phir jeene ki tamanna hai ”. Together with the spirit behind the next line of this beautiful song, she has conveyed an eternal message of optimism,” he concluded.