RBI Monetary Policy: Continued policy support warranted for durable growth

RBI Governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das has called for "continued policy support" for the economy despite inflation expected to end FY23 above the medium-term target of 4 percent.

In his statement post the conclusion of the meeting of the central bank's Monetary Policy Committee (MPC), Das said on February 10 that inflation will likely peak in the current quarter.

"On balance, headline inflation is expected to peak in Q4:2021-22 within the tolerance band and then moderate closer to target in H2:2022-23, providing room for monetary policy to remain accommodative," the governor said in his statement.

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The RBI has retained its Consumer Price Index (CPI) inflation forecast for FY22 at 5.3 percent. In FY23, CPI inflation is seen cooling down to 4.5 percent.

The RBI's quarterly CPI inflation forecasts are as follows: 5.7 percent for Q4 FY22, 4.9 percent for Q1 FY23, 5.0 percent for Q2 FY23, 4.0 percent for Q3 FY23, and 4.2 percent for Q4 FY23.

Commenting on CPI inflation data for January 2022, slated to be released on February 14, the RBI Governor said the figure will move even closer to the upper-bound of the central bank's inflation mandate of 2-6 percent, largely due to an unfavourable base effect.

In December 2021, CPI inflation had risen to 5.59 percent. Economists see a further increase in January 2022.

The CPI inflation forecast of the RBI, as well as the decision to retain the repo and reverse repo rates at 4.00 percent and 3.35 percent, respectively, is seen as 'dovish' by economists.

"Sometimes markets expect dessert, but then realise that the main course is still not over," said Aurodeep Nandi, Nomura's India Economist.

According to Nandi, the RBI has surprised by "not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for inflation for FY23".

"This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve, until macro circumstances warrant a shift of gears,' Nandi added.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, agreed. According to Bhardwaj, CPI inflation may average 5.0 percent in FY23 - 50 basis points higher than the RBI's forecast of 4.5 percent.