Inflation has become the biggest challenge for several countries and the Reserve Bank of India is taking steps to effectively deal with it, the central bank’s governor Shaktikanta Das has said. In an interview, the RBI chief said that the bank had been taking measures to rebalance liquidity through VRRRs, roll back the expansion of our balance sheet and the liquidity infusion related to the pandemic before it increased repo rates during an off cycle MPC meet in May to address rising inflation.
“As far as challenges are concerned, inflation is definitely the biggest challenge confronting most countries. Almost all market economies are confronted with mounting inflation, which is a problem that worries governments and central banks worldwide. The current surge in our inflation is primarily because of global factors. From April onwards we have been taking rate actions to effectively deal with rising inflation,” Das said in an interview with the Times of India.
Quiet steps don’t make the headlines, Shaktikanta Das said when asked why the RBI had not hiked the repo rates before May. “In our April 2022 policy, we sent out a clear message by prioritising inflation over growth. We introduced the Standing Deposit Facility at a rate that was 40 basis points higher than the reverse repo rate. Consequently, the overnight call rate – which is the operating target of monetary policy – moved up in tandem,” he said.
“The idea behind these steps was to take out liquidity from the system in a very gradual and orderly manner. Unless you take out excess liquidity, overnight call rates will not respond to rate hikes and will remain lower. So, you have to deal with the problem of excess liquidity first,” noted the RBI governor in the interview.
Shaktikanta Das also said that India’s retail inflation will remain over 6 per cent until December and then come down. “We are well on track to bring down inflation and inflation expectations. Until December, CPI inflation is expected to remain higher than the upper tolerance level; thereafter it is expected to go below 6 per cent as per our current projections. there will be inflationary pressures, and only in the fourth quarter, we have projected it to go below 6 per cent.” Inflation has now become broad-based and that is the issue which the RBI is now addressing through its actions, he added.
CPI inflation cooled off to 7.04 in May after touching a near-eight-year high of 7.79 per cent in April. Following the RBI’s second repo rate hike in June and the government’s import duty cut, cooking oil price has also become cheaper by up to Rs 20 for different brans, which may help in lowering the inflation rates further.
The Indian economy is gaining traction and the economic activity revival is steady now, Shaktikanta Das said. “The revival of economic activity continues to be steady and is gaining traction. GDP has exceeded 2019-20 levels, and from April 2022 onwards, many high-frequency indicators that we monitor are showing steady improvement. The economy is back on track. In terms of business activities or investment, the opportunities are larger in pharma, technology, and renewables, etc,” he said.