Inflation to remain high but growth still priority: Michael Patra

Deputy governor Michael Patra said persistent supply shocks, pass-through of imported price pressures to retail prices and building wage pressures in the organised sector will keep inflation above the 5% mark till fiscal 2023-24. Patra was delivering the keynote address at a financial market summit organised by the Confederation of Indian Industry (CII).

“In the MPC’s (monetary policy committee) assessment, inflationary pressures are largely driven by supply shocks. Although shocks of this type are typically transitory, the repetitive incidence of shocks is giving inflation a persistent character. Contributions to inflation are emanating from a narrow group of goods – items constituting around 20% of the CPI are responsible for more than 50% of inflation,” Patra who is also a part of the MPC said.

He added that three elements namely edible oils, LPG and petrol are contributing 1/3rd of the inflation which has kept inflation on the top end of the 2% to 6% RBI band.

“The analysis of inflation dynamics indicates that the easing of headline inflation from current levels is likely to be grudging and uneven. The distribution of inflation has skewed to the right…. to us, this indicates persistence of supply shocks. Over the months ahead, supply augmenting measures taken by the government should mend disruptions and imbalances…. but the pass-through of imported price pressures to retail prices remains incomplete,” Patra told industry leaders.

The once in a century pandemic allowed the MPC to tolerate higher average inflation of 6.2% in 2020-21 due to a rise in prices particularly in the second and third quarters of the fiscal.

“The envisaged glidepath should take inflation down to 5.7% or lower in 2021-22, to below 5% in 2022-23 and closer to the target of 4% by 2023-24. The rebalancing of liquidity conditions will dovetail into this glidepath, but the choice of instruments is best left to the judgment of the RBI with its considerable experience with such tapers,” Patra said.

In the last monetary policy review in August the RBI said it will conduct four variable reverse repo rate (VRRR) auctions between August 13 and September 24 to absorb surplus liquidity from the banking system. Patra reiterated the RBI stand that this move by the central bank should not be misconstrued as a liquidity tightening measure or a precursor to rate hikes.

“At the end of September up to which VRRRs auctions have been announced, the daily surplus absorbed under the liquidity adjustment facility (LAF) will still be around Rs 9 lakh crore – the same level as today – if not higher, more than half of which would still be under the fixed rate reverse repo. The RBI will remain in surplus mode and the liquidity management framework will continue in absorption mode. It is our hope that credit demand will recover and banks will get back to their core function of financial intermediation as soon as they can. This is the natural and the RBI-preferred manner in which surpluses in the LAF can be reduced,” Patra said.

However, he added that markets will return to regular timings as normalcy returns which will mean that the central bank’s liquidity management framework announced in February 2020 which envisages replacing short term and overnight repos with a long- term variant, lasting as long as three years.

Currently however, the RBI will focus on the need to revive and sustain growth on a durable basis and mitigate the impact of the pandemic by keeping liquidity ample and financial conditions easy.

RBI expects India’s GDP to grow at 9.5% this fiscal helped by a recovery in capacity utilization in manufacturing in the second half of the year, lower investories and improving order books and production.