The six-member monetary policy committee (MPC) voted unanimously to maintain status quo with regard to the policy repo rate and by a majority of 5 to 1 to retain the accommodative policy stance, as the domestic outlook is now somewhat clouded by the Omicron variant. RBI Governor Shaktikanta Das emphasised that the Indian economy is relatively well-positioned on the path of recovery, but it cannot be immune to global spillovers or to possible surges of infections from new mutations, including the Omicron variant.

The Governor and RBI top-brass, comprising Deputy Governors, MK Jain, MD Patra, M Rajeshwar Rao and T Rabi Sankar, answered media queries on the MPC’s decision. Excerpts:

What is your assessment

of the economic activity?

Das: As I have pointed out in my statement, activity in various segments of economy has crossed pre-pandemic levels, but in certain key segments like private investment, private consumption and a few other sectors, which are very critical for growth of GDP, it is still lagging behind pre-pandemic levels. The economy is facing several headwinds, emanating from mostly international market factors in terms of financial market volatility, volatility in crude prices, supply side bottlenecks like container shortages and shipping charges and shortages of key inputs like semiconductors.

So, there are headwinds. That also has to be factored in and there is a surge in infection in many European and advanced economies. Adding to the uncertainty is the latest Covid-19 variant, Omicron.

With this background, the MPC judged it is better to be cautious. As far as India is concerned, economic activity in a few critical sectors is still below pre-pandemic levels.

How will you achieve inclusive recovery?

Patra: Anchoring of inflation around a certain target is important for inclusive growth. A lot of research shows how monetary policy and financial inclusion find complementarity.

One of them shows that monetary policy needs to choose the correct metric for inflation, and the choice of the headline CPI is actually an inclusion friendly inflation policy.

Is the policy underestimating inflationary pressures?

Das: It’s not correct and fair to compare Indian inflation dynamics with what is prevailing in the most advanced economy, which is the US. See the gap between the US inflation target and where they are…For India, our median target is 4 per cent. The last two inflation prints, we are at 4.5 and we are projecting that in Q4 it will go up, and thereafter for two successive quarters it will be 5 per cent.

I have said in my statement that we are fully mindful and aware and cognizant of the requirement to maintain price stability together with financial stability. We are looking at a composite set of factors as a central bank, which is an inflation-targeting central bank, which has also got several other responsibilities.

The major responsibility being to ensure financial stability. We look at a whole lot of other things, in which inflation targeting is a very important component. We feel we are in sync with the evolving growth-inflation dynamics and how it is playing out. Patra: Debate between (inflation being) transitory or permanent is in no way settled. The transitory school keeps saying it is the incidence of several shocks, one after the other that is giving it a persistent colour, but each of them are individually transitory.

A lot of reports say port congestion is unclogging and containers are becoming available so that the much-dreaded supply chain bottlenecks are slowly unwinding. The sense one gets is that there is what is called a bull whip effect that today’s shortages will become the surpluses of tomorrow. When finished goods inventories build up and are let on in the market, there will be very little new orders and so low growth and low inflation. And very weak pricing power.

Monetary policy is for the medium term and not for instant reactions. And, over the medium term as we have set out in our projections, we see a peak in Q4 of this year and then inflation trending down. If you see the projections in conjunction with the monetary policy report, we are going to look at inflation in 4-4.3 per cent by end of 2022-23.

The reaction to inflation always involves a sacrifice of growth. One must not shoot from the holster. When you see the inflation hump in sight and the progress of inflation towards the target in view, it gives us the space to address growth concerns, which is still very weak, as the Governor mentioned, and needs policy support from all sides.

Is 7 per cent bank credit growth good enough

for the Indian economy?

Das: Seven per cent credit growth is definitely less for the Indian economy. It should increase. However, there is good flow of resources to the commercial sector….Be it by way of bank credit or market related credit instruments – debentures, commercial papers – there has been an improvement.

Due to liquidity surplus conditions and fall in market borrowing rates, large and medium corporates have raised money from the market and also deleveraged – prepaid high cost bank loans and replaced this with low cost funding from the market. Private investments are yet to pick up. Demand pick up needs to go up ….corporates are in a wait-and-watch mode, and they still have surplus capacity. Once capacity utilisation goes up, automatically credit offtake will improve.

In the growth-inflation matrix, what takes precedence at the current juncture?

The overarching priority of the RBI at this stage is on revival of growth. Price stability is also our concern. So, therefore, at this moment, without losing sight of the requirement of price stability, our overarching priority is on growth.

What is the latest update on central bank digital currency (CBDC)?

Rabi Sankar: Work of two types of CBDCs – retail and wholesale – is on. Lot of work has been done on wholesale CBDC. Retail CBDC is a bit complicated (due to cybersecurity and possibility of digital frauds concerns). So, it will take more time. Whichever CBDC is finalised first, we will release it for pilot.

Are there concerns on inflation being downplayed? When will output close out?

Patra: Our target is defined in terms of headline CPI inflation. And as far as headline CPI inflation is concerned, we are at 4.3-4.5 per cent, which is broadly in alignment with the target. So, that gives us some headroom to address issues relating to growth, which is really weak and needs lot of support.

Starting with the November reading, you are going to see a decline in core inflation due to the excise duty cuts on petrol and diesel, which will feed through into the economy starting November. The fuller effects will be seen in December. But the indirect effects will last for a full year and that will help to bring down core inflation. That also gives time to the authorities to contemplate measures to bring down cost pressures that impact on core, including as you saw their readiness to bring down taxes, bring down margins that have been applied. And that will help to bring down core. But, all-in-all, relative prices, given the budget constraints, must adjust to each other and headline inflation will be our metric by which we will guide monetary policy.

Currently, our assessment is that output gap very, very wide and it may take several years to close.

What is the update on the deposits of PMC Bank depositors?

We have brought out a draft scheme, which is now in the public domain. And we have given time up to December 10th for various comments from all the stakeholders. We will get all the comments by December 10. We will examine them thereafter and as per law the scheme, as finalised by us, will be sent to the government for approval. So, we propose to do it very quickly.