RBI raises inflation estimate, pivots focus to price stability

Central bank holds rates, lowers growth estimate as war’s shadow clouds India’s prospects

The Reserve Bank of India’s Monetary Policy Committee on Friday raised its estimate for inflation in FY23 to 5.7%, from the 4.5% forecast in February before Russia invaded Ukraine, and stressed that it would now focus on the “withdrawal of accommodation to ensure that inflation remains within the target going forward”.

“In the sequence of priority we have now put inflation before growth,” RBI governor Shaktikanta Das said at a press conference after announcing the MPC’s decision to hold interest rates at its first monetary policy review of the new fiscal year. “For last three years growth was ahead of inflation in sequence. This time we have reversed it because we thought the time is appropriate,” he added.

Similarly, the RBI has started withdrawing some of the accommodation it had provided in the last two years as it is headed towards normalcy, though gradually.

“The stance continues to be accommodative but we are now focussing on withdrawal of accommodation. So, gradually we are moving away from an ‘accommodative’ stance which has been there for more than two years,” Mr. Das said.

The central bank had shifted from a ‘neutral’ to an ‘accommodative’ stance In the middle of 2019.

Elaborating on the change in tack, RBI Deputy Governor Michael Debabrata Patra said, “We have taken the policy repo rate to an all-time low which is 4%. If you adjust it with the targeted inflation then the real rate is zero. That was ultra accommodation. The situation is changing and now we want to withdraw the ultra accommodation but there is scope to remain accommodative.”

Mr. Das explained that the MPC had decided to revise the inflation projections for FY23 upwards with the estimate for Q1 at 6.3%; Q2 at 5.8%; Q3 at 5.4%; and Q4 at 5.1% due to “war-induced factors”.