In what appears to be a change in the mindset of RBI triggered by the Covid pandemic, Patra said it is better to look at inflation as a “glide path rather than crash landing.”
The deputy governor’s comments will be music to the ears of the equity market, which may sense a longer-than-expected continuation of easy money policies in the country and the ongoing liquidity party.
“Taking into account the outlook for growth and inflation and keeping in mind the inherent output costs of disinflation, it is pragmatic to envisage a glide path along which the MPC can steer the path of inflation into the future,” Patra said at Confederation of Indian Industries (CII) on Thursday.
Patra said the rate-setting panel tolerated high inflation due to the ‘once-in-a-century’ pandemic, but it will aim to bring down the headline inflation to 5.7 per cent in 2021-22 below 5 per cent in 2022-23 and closer to the target of 4 per cent by 2023-24.
Consumer price index (CPI) inflation in India has eased in recent months, giving weight to the central bank’s argument that the current bout of inflation is more transitory than permanent driven primarily by supply shocks caused by the pandemic.
The headline inflation eased to a four-month low of 5.3 per cent in August, providing further breathing room to the MPC to extend its current accommodative stance and keep its gaze on growth.
A glide path to bring down inflation shows the central bank’s hesitance to take any step that could smother the green shoots of growth recovery. The Indian economy has only recently shown signs of escape velocity from the clutches of the pandemic after a devastating second wave.
With Finance Minister Nirmala Nirmala Sitharaman setting out a similar glide path for fiscal deficit over the next five years, Patra’s comments suggest the macro-economic policy is set to remain firmly focused on growth even at the cost of high inflation.
Catching up, not staying ahead
With a glide path in place, MPC is hinting at a harmony with being behind-the-curve on tackling inflation.
“We think Deputy Governor Patra’s comments together with Governor Das’ recent comments send out a clear signal that there is a strong institutional (RBI) consensus that it is too premature for policy normalisation, even though some external MPC members have voiced discomfort over low levels of reverse repo rate and excess liquidity,” Nomura Securities said in a note.
For the equity market, the risk of adjustment to the central bank’s liquidity measures taken over the past 18 months may also diminish, if the central bank goes slow in tackling high inflation.
“The rebalancing of liquidity conditions will dovetail into this glide path,” Patra said, suggesting that RBI is willing to remain accommodative on excess liquidity despite obvious concerns over its fallout on financial stability.
And then, catchup too fast
The trouble with being behind-the-curve on inflation is that as higher inflation expectations become entrenched, as they have recently, the MPC will have to move faster than it would like to control it.
“Amid rising inflation expectations and nascent signs of a revival in credit growth, we view high inflation as a clear risk due to too loose policies and high policy tolerance of inflation,” Nomura Securities said.
Despite Patra’s comments, Nomura Securities is sticking with its view that the MPC may hike repo and reverse repo rate by 75 basis points in 2022 starting as soon as February.
“This is underpinned by our view that sticky and elevated levels of inflation will threaten policy credibility, and the rapid cyclical growth recovery obviates the need for emergency period monetary policy accommodation,” Nomura said.
