Only 20% of the items responsible for more than 50% of the inflation: RBI’s Michael Patra

“The recovery appears broad-based and the pivot is manufacturing, but output is still below pre-pandemic levels, especially in contact-based services.” Patra noted.

Manufacturing showed a decent pull back in the first quarter of the current fiscal with a growth of 49.6%. Contact-intensive sectors like hospitality are holding back the recovery process as the economic activity bounces.

On inflation, the deputy governor said that core inflation remain sticky even though headline number has moderated since May.

“Contributions to inflation are emanating from a narrow group of goods – items constituting around 20 per cent of the CPI are responsible for more than 50 per cent of inflation. The analysis of inflation dynamics indicates that the easing of headline inflation from current levels is likely to be grudging and uneven,” he noted.

Retail inflation moderated to 5.3% in the month of August but remain above the medium-term target of the RBI. The wholesale prices, however, went in the opposite direction after easing for two months and climbed up to 11.39% on the back of hardening of prices of fuel and manufactured items.

Patra said that the envisaged inflation glidepath should bring down inflation closer to RBI’s medium-term target of 4% by 2023-24.

“The envisaged glidepath should take inflation down to 5.7 per cent or lower in 2021-22, to below 5 per cent in 2022-23 and closer to the target of 4 per cent 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 that even though the first quarter GDP growth came in a shade lower than RBI’s estimate, the economy is set to grow at 9.5% this fiscal.

However, he highlighted that even with the projected growth of 9.5% the economy may just about exceed pre-pandemic levels.

“For the economy as a whole, the output gap – which measures the deviation of the level of GDP from its trend – is negative and wider than it was in 2019-20. Given these developments and with the GDP outcome for the first quarter coming in just a shade below the RBI’s forecast, the projection of growth of 9.5 per cent for the year as a whole appears to be on track. Even so, as Governor Shri Shaktikanta Das pointed out in a recent interview, the size of the economy would just about be exceeding the pre-pandemic (2019-20) level,” Patra said.

Speaking on the extraordinary decision to lower the reverse repo more than proportionately, Patra said that onset of pandemic called for some out-of-the-box solution to ensure that liquidity kept flowing specially when the credit demand had dropped due to risk aversion.

He said that the “RBI decided to operate through other segments of finaccial markets to keep the lifeblood of finance flowing”.

“The reduction in the reverse repo rate eased financial conditions so much that it facilitated record levels of access to finance by corporates and governments at low interest rates/spreads,” Patra noted.