MUMBAI: India’s GDP will be just one per cent above the pre-pandemic level even after the estimated 9.2 per cent growth in FY22, and this factor coupled with comfort on inflation make the RBI to continue with the accommodative monetary policy, RBI deputy governor M D Patra said on Wednesday.
Making it clear that India’s slide on growth began in 2017, much before the pandemic, Patra, who oversees the critical monetary policy department in the central bank, said the country has lost up to 15 per cent of output forever, which has resulted in the loss of livelihoods as well.
The central banker denied India being behind the curve on acting against inflation and beginning to hike rates as is being done by other countries, saying the price rise has peaked in January. He also said the RBI “reserves the right to choose its time to normalise”.
“India is in a comfortable position as far as inflation is concerned. And, since that is there, we have the headroom to support growth and we will do so because we are dealing with lost output, lost livelihoods,” Patra said, speaking at the annual Asia Economic Dialogue organised by the Pune International Centre.
He added that the 6.01 per cent headline inflation in January is the peak level and the same will decline to the RBI’s target of four per cent by the December 2021 quarter.
On growth, he said India, which had one of the strictest lockdowns on entering the pandemic in 2020 that led to a nearly one-fourth contraction in the economy in Q1FY21, was the second worst-hit country after Peru.
“And, if you knock out the fiscal stimulus, India exceeds the depression of Peru. So, we have dug out of the deepest recessions in the world,” Patra added.
On inflation, he said the level is appearing elevated purely due to the base effects but the momentum or month-on-month change in inflation is negative and pulling down inflation.
“Our sense is that headline inflation has peaked in January and from here on, it will ease down to the target of four per cent by last quarter of 2022.
“This has provided us the space to maintain the policy rates low and persevere with an accommodative stance, so that we can focus all energies on accelerating and broadening the recovery,” he added.
He said the cuts in excise duties of petroleum products are still working the way through the economy and keeping these pressures subdued.
Patra conceded that India’s approach to policy is contrary to the rest of the world, where central banks are either tightening or have guided towards such moves.
But, he added, inflation is set to peak globally by mid of 2022, whereas it takes up to a year’s lag for monetary policy actions to play out, which means rather than having the desired effect of controlling inflation, they will kill the recovery then.
“As increasing number of central banks tighten monetary policy, or indicate intent to normalise, financial conditions are hardening globally and markets are turning increasingly volatile.
“To my mind, this is the biggest risk to global recovery and may even tip it to a premature recession,” Patra said.
He said monetary policy is an instrument of stabilisation works by adjusting demand to the level of supply, not the other way around. Consequently, efforts to address immediate inflation pressures that we are seeing today all over the world are caused by supply bottlenecks that keep aggregate supply below the demand may not work.