India's RBI to follow nuanced approach due to inflation risks

Seemingly cautious on inflation, which has surged after the Russian-Ukraine war, RBI said the immediate impact of geopolitical aftershocks is on price rise, with close to three-fourths of the consumer price index at risk.

The lower surplus of ₹30,307.45 crore transferred to the government in 2021-22 against ₹99,122 crore in the previous fiscal was due to a sharp increase in the Contingency Fund, the report said. The central bank made a provision of ₹1.15 trillion for the Contingency Fund in fiscal 2021-22 against ₹20,710.12 crore in the previous.

The fund was maintained at 5.5 per cent of the balance sheet—the lower end of the 5.5-6.5 per cent band as recommended by the Bimal Jalan committee.

The central bank changed its focus to control inflation after the geopolitical situation worsened. Since the onset of the pandemic, the RBI’s main objective has been to support growth.

Earlier this month, the six-member RBI monetary policy committee increased the repo rate—for the first time in four years—by 40 basis points to 4.4 per cent.

“Overall, headline inflation averaged 5.5 per cent in 2021-22 as against 6.2 per cent a year ago. Headline inflation breached the upper tolerance band in Q4:2021-22 and rendered the conduct of monetary policy challenging,” the RBI Annual Report said.

In line with the objective to bring down inflation, RBI has started withdrawing liquidity from the banking system.

During the year, ₹2.2 trillion was withdrawn from the system through restoring the cash reserve ratio (CRR) to pre-pandemic levels, targeted long-term repo operations, and open market operations, it said.

On the growth front, the central bank suggested recovery was underway amid headwinds.

“…the year gone by brought many challenges, but a recovery is underway in spite of headwinds. The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending,” the report said.

The report said early indicators pointed to revival in economic activities across other sectors that needed to be nurtured.

Amid these adverse international developments, the Indian economy was relatively well-placed to strengthen the recovery underway and improve macroeconomic prospects, it said.

However, for the fourth quarter of fiscal 2021-22, the third wave of the pandemic and the geopolitical conflict, has caused a loss of pace in the recovery and darkened the outlook, RBI observed.

The report observed the sector was cushioned against pandemic-related disruptions through adequate liquidity support and regulatory dispensations provided by the RBI.

ALCHEMPro News Desk (DS)