Updated: September 10, 2021 7:05:33 am
Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday expressed optimism about recovery in the Covid-hit economy, stating the current quarter (July-September) will be better than the previous (June) quarter.
The RBI, he said, is “very serious about anchoring inflation expectations and inflation around the target” of 4 per cent.
Sticking to the 9.5 per cent growth projection for 2021-22, the Governor said there was no evidence that asset prices, and to some extent the current high stock prices, were influenced by excess liquidity.
The RBI was watching growth impulses and inflation before making changes in its accommodative policy stance, he said.
Das, who was in conversation with P Vaidyanathan Iyer, Executive Editor (National Affairs), The Indian Express, and Amy Kazmin, South Asia Bureau Chief, the Financial Times, in the third of a series of online agenda-setting debates organised by The Indian Express and the Financial Times, said: “The fast-moving indicators are looking quite upbeat. We track about 100-odd fast-moving indicators, and I can mention some of them, like the sale of two-wheeler vehicles, the sale of passenger cars, or the steel and cement production and GST, and several parameters and indicators are looking up.”
At this point in time, RBI’s projection of 9.5 per cent growth for this financial year stands, the Governor said. “I think it will hold good. The second quarter of the current year, that is the current quarter, will do better sequentially than the previous quarter. But there is a base effect of last year, which will have its impact throughout this year, but the base effect will gradually moderate going forward.”
However, he qualified the optimism with a mention of the possibility of a third wave of the Covid-19 pandemic.
“I must say that uncertainty of a possible third wave, which people are talking about…that uncertainty still remains. I think people and businesses are now more adapted to the Covid protocols and more adapted to continuing with their business activities and other activities, even when there is a problem.”
“But again, everything depends on the severity, and the spread of the third wave of the pandemic,” Das said.
The Governor said the current inflation was “mainly driven by supply side factors, partly because of international factors around high commodity prices, high shipping charges and container costs”.
“Mostly, international commodity prices are going up, (and) that is feeding into domestic inflation.(The) domestic factors are the high prices of petrol and diesel, and also certain commodities, certain items, like appliances or edible oil,” he said.
“We monitor the situation very closely. The RBI is an inflation-targeting organisation, but in the time of the pandemic, we have decided to focus on growth, more emphasis on growth because when growth completely gets dissipated, then it will cause huge long-term challenges for the economy. During the pandemic, therefore, instead of the exact target of 4 per cent, the MPC has decided to operate within the band of 2-6 per cent.”
Inflation, which was more than 6 per cent for a couple of months, has moderated to 5.6 per cent in the last print. “Our expectation is that from now on, inflation will gradually moderate. So, the possibility of a sustained increase in inflation beyond 6 per cent is highly unlikely at this point of time, but nonetheless, we are watchful,” Das said.
“We are very serious about anchoring inflation expectations around the target. Going forward, we remain committed to achieve that, over a period of time in a very non-disruptive manner.”
Asked about the unwinding of the accommodative policy stance, Das said the RBI had adopted the accommodative stance even before the pandemic set in — some time in 2019. “Whether we will continue with the accommodative stance, we will sort of look at the rates, and that is a decision which the MPC will take. But nonetheless, my assessment, and our assessment in the RBI is…we are very closely watchful of inflation. We are watchful of the growth impulses becoming sustained and taking deeper roots. We are watchful of the inflation dynamics and inflation, which is expected now to moderate,” he said.
On the possibility of high liquidity fuelling a rise in asset prices, Das said: “We will take a call depending on the incoming numbers with regard to high liquidity position. Let me tell you that the current inflation…is driven mainly by supply-side factors. And at the moment, there is no evidence to show that the high liquidity is feeding into general prices. The Sensex has been hitting new peaks on a daily basis and has crossed pre-pandemic levels now.
“…Globally, there is a surplus liquidity and stock prices are very high, and are booming in almost every market, including India… But…I wanted to mention is that there is no evidence of high asset prices, namely the high stock prices, feeding into general inflation or general prices.”
Asked about the large haircuts in some of the resolutions of stressed assets, Das said “the primary objective of the IBC is…to resolve the business so that the company or the business continues its operations, and the economic value which that business creates continues unabated.”
“In some cases, the haircut has been 90 per cent, but there are cases where the haircut has been much less. There is perhaps need to consider amendments. For example, the process of the time taken to admit a case to the NCLT. The admission itself takes a lot of time, so can we deal with that issue through some legal amendments.”
On the sluggish credit offtake, Das said, “For the regulator, we have to provide an enabling ecosystem where the banks are in a position with adequate capital and liquidity, and beyond that it is a function of the market. Now, why the offtake has been low? This is primarily because of the uncertainty which still prevails with regard to the Covid pandemic…whether the revival of activity will be sustained.”
“There is a slack in the demand. There is an output gap. And the aggregate demand is also below the pre-pandemic level. Once the business gains confidence that the economy improves and the revival of activity will sustain… I think that should be a point where there will be investment and will lead to a demand for credit,” he said.
On cryptocurrencies, Das said, “We have conveyed our major concerns to the government about cryptocurrencies from the point of view of financial stability… And I think we need more credible answers.”
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