The Reserve Bank of India's (RBI) Governor Shaktikanta Das today reasoned that the central bank refrained from raising interest rates early this year because the projected retail inflation was well under the tolerable limit prior to the start of the Russia-Ukraine war.
“We had done our internal and scenario analysis assuming crude going up to $100, which was at extremely high level. Nobody had thought the crude price will shoot up to $100 per barrel. The crude at that time was around $82 -83 per barrel,” said the Governor.
The RBI’s internal analysis showed that the inflation is going to be around 5 per cent in 2022-23 even if the crude touches $100. But Russia-Ukraine war changed everything.
The RBI has convened a special meeting of the six-member monetary policy committee (MPC) tomorrow on draft a letter for breaching the inflation target for three consecutive quarters. This letter would be submitted to the government as per the inflation targeting mandate given to the RBI.
The MPC meeting tomorrow needs to explain the reasons for missing the target. The CPI, or retail inflation, which the RBI tracks for setting interest rates, has been consistently hovering above 6 per cent in the first 9 months of this year. CPI was at 7.41 per cent in the month of September this year.
“In early this year, when we looked at the CPI inflation trajectory ,our assessment showed that the average inflation would be 4.5 per cent in 2022-23,” said the Governor.
The RBI's professional forecaster also predicted a similar inflation trajectory of around 4.5 -5.2 per cent in 2022-23.
In a FICCI seminar here today, the RBI Governor touched upon the issue by saying that much has been made about RBI not being able to adhere to the inflation target. “If we had stated the process of tightening earlier , what would have been the counter factual scenario. What you prevent in the process doesn’t get the kind of appreciation that it should get,” said Das.
“We prevented a complete downward turn of our economy after recording negative growth in 2020-21. India’s economy bounced back in 2021-22 and sustaining it in 2022-23.“ he added.
“How was it possible if we had prematurely started tightening? ,” he asked. “We didn’t want to upset the process of recovery,” said Das. The projected GDP is around 7 per cent for 2022-23.
“We wanted the economy to safely land the shores and reached the shores and thereafter try and pull down inflation. But then the war between Russia and Ukraine started in February 22 and the global crude and other commodity prices shot up within matter of days,” said Governor.
The RBI will now also have to give the action plan to bring back the inflation to below 6 per cent. This would be very challenging as the nascent recovery in the economy would be a casualty. The RBI is likely to withdraw the liquidity more aggressively by keeping the system at neutral as against accommodative, which is today. In addition, the rate hikes in repo rates will continue in the December policy. The RBI has already hiked the repo rate by 190 basis points to 5.90 per cent this year.
The central bank will also have to give a timeline for getting back to the inflation target of 4 per cent with an upper tolerance limit of 6 per cent. RBI's own projection for inflation is 6.7 per cent for 2022-23. It expect inflation to fall below 6 per cent by the fourth quarter of 2022-23. CPI inflation is expected to fall further to 5.0 percent in the first quarter of next year i.e 2023-24. The RBI is likely to stick to these timelines in its response to government.
Also read: RBI Guv Shaktikanta Das lauds the launch of digital Rupee, calls it is 'landmark'