RBI flags risk to growth, calls for fiscal steps
- Experts have already cut India’s growth forecast for FY22 as the pandemic continues to spread across the country.
The Reserve Bank of India (RBI) Thursday said that runaway inflation has emerged as a major impediment to further monetary policy interventions by the bank to stimulate economic growth and urged for additional fiscal measures to mitigate supply-side driven inflation pressures. “Monetary policy will monitor all threats to price stability to anchor broader macroeconomic and financial stability while continuing with the accommodative stance,” RBI said in its 2020-21 annual report.
Experts have already cut India’s growth forecast for FY22 as the pandemic continues to spread across the country.
In April, the central bank had estimated retail inflation at 5% in Q4 of fiscal 2021; 5.2% in Q1 FY22; 5.2% in Q2; 4.4% in Q3; and 5.1% in Q4, with risks broadly balanced. It had also projected economic growth at 10.5% in FY22. The monetary policy committee (MPC) would meet between June 2-4 and is expected to maintain the accommodative stance for the whole calendar year.
Economists at Barclays said, the MPC has no option but to be accommodative, even as it monitors incipient price pressures, and keep all rates on hold.
As part of its inflation-targeting mechanism, the government has retained the RBI’s flexible inflation target in the 2-6% band for the five years through March 31, 2026.
While inflation, measured by the wholesale price index, softened in 2020-21, there was no pass through to retail inflation. According to the RBI, the substantial wedge between wholesale and retail price inflation during the year pointed to persistence of supply-side bottlenecks and higher retail margins, underscoring the importance of supply management.
Starting fiscal year 2021, the RBI had changed its accounting year from July-June to April-March. During this period of nine months, the central bank saw a 69% increase in earnings from foreign exchange transactions to ₹50,629.18 crore.
From July 2020 to March 2021, the RBI gross sold a total of $85.2 billion of its foreign exchange. Interestingly, much of the dollar were sold in the last 2 months of the accounting year, soon after the Budget announcement. During the nine months, the RBI’s balance sheet grew 6.99% to ₹57.07 trillion for the year ended March 31, 2021, “mainly reflecting its liquidity and foreign exchange”.
The central bank also pointed out that the unabated rise in equity prices and the asset price inflation despite the contraction due to the pandemic poses the risk of a bubble. Equity prices surged to record highs, with Sensex crossing the 50,000-mark on January 21 to touch a peak of 52,154 on February 15 .
“This order of asset price inflation in the context of the estimated 8% contraction in GDP in 2020-21 poses the risk of a bubble,” the report said.
The RBI said that the monetary policy in 2020-21 had to deal with the twin challenge of reviving growth while also ensuring that inflation eased from above the upper tolerance band.