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RBI Dy Governor Patra’s speech has key clues on monetary policy

The central bank’s glide path envisages inflation at close to 4 per cent only by 2023-24 

September 16, 2021 / 04:33 PM IST
Representative image.

Representative image.

RBI Deputy Governor Michael Patra made a spirited defence of the central bank’s conduct of monetary policy during the pandemic in his speech at the Financial Markets Summit of the Confederation of Indian Industry on Thursday. Far more significant is the fact that his speech contained important clues about the future direction of monetary policy.

Listed below are some of those points:

On growth

  1. Data suggest that the global recovery might be faltering or at least losing pace

  2. In India, while the recovery is broad-based, with manufacturing as the pivot, but output, especially in contact-based services, is still below pre-pandemic levels

  3. Seasonally adjusted capacity utilisation in manufacturing is expected to recover in the second half of the year, but catching up with the pre-pandemic trend will take time

  4. Inventories of raw materials are below pre-pandemic levels and are expected to be drawn down further, suggesting that demand is gradually recovering

  5. For the economy as a whole, the output gap - which measures the deviation of the level of GDP from its trend – is negative and wider than it was in 2019-20

    On inflation

  6. Global inflation continues to linger and the jury is still out whether it is transitory or persistent

  7. In India, inflation is moderating, but core inflation is still elevated and sticky

  8. Supply shocks are likely to be persistent and the easing of headline inflation from current levels is expected to be ‘grudging and uneven’

  9. rising staff costs suggest incipient wage pressures are building in the organized sector

  10. Although the government’s measures to augment supply may help bring down costs, the pass through of imported price pressures to retain prices is incomplete

  11. surveys of the manufacturing, services and infrastructure firms are pointing to an increase in selling prices in the period ahead

  12. While the inflation target remains at 4 per cent, there will be a glide path towards achieving it, with average inflation falling from 6.2 per cent in 2020-21 to 5.7 per cent in 2021-22 to below 5 per cent in 2022-23 to closer to the 4 per cent target by 2023-24

    On Liquidity


  13. Liquidity is abundant, with close to Rs 9 trillion being absorbed by the RBI on a daily basis, but markets are constantly seeking reassurance that the accommodative stance will continue

  14. The rebalancing of liquidity conditions will ‘dovetail’ into the glide path for inflation ( see no. 12 above)

    Financial markets

  15. Financial markets are on edge, trying to guess when policy normalisation will start

  16. Markets are trying to read between the lines of central bank policies

  17. The financial markets show divergent behaviour---equities are exuberant, while bond markets are ‘cynical’

Summing up, the Deputy Governor has reiterated that demand is gradually recovering, lowering of inflation to 4 per cent will take years and any withdrawal of liquidity will follow a similar glide path. In other words, a long and slow tapering is on the cards.
Manas Chakravarty

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