RBI to prioritize inflation over growth: Governor Shaktikanta Das

RBI to prioritize inflation

The recently released CPI data from the Ministry of Statistics and Programme Implementation shows that the retail inflation in India has risen to 6.95% in March 2022, which is the highest in the last 17 months. This has forced the apex bank of the country RBI to shift its focus from promoting growth to containing inflation in the near future.

March witnessed a consecutive breach of RBI’s upper band of 6%, resulting in an average rise in inflation of 6.3% for Jan-Mar period. If sufficient measures are not taken immediately, then we may see the Monetary Policy Committee’s mandate failing as well. All these have compelled RBI to prioritize controlling inflation and meeting its target over favoring growth.

RBI has been favoring growth for the last 3 years over anything else. This has benefited the economy and market a lot. However, rising global inflation, and geopolitical tensions have finally entrenched the Indian economy as well. The inflation level is even over what some experts expected it to be.

Prioritizing Inflation Over Growth

The apex bank’s Governor Shaktikanta Das said that RBI is now prioritizing to contain inflation over promoting growth. “In the sequence of priorities we have now put inflation before growth. For the last three years starting February 2019, we had put growth ahead of inflation in the sequence. This time we have revised that because we thought that the time is appropriate and that is something which needs to be done,” he said to reporters last week.

To recall, the earlier projected inflation of 4.5% has already been revised (increased) by more than a percentage to 5.7%. On the other hand, the revised GDP growth figure now stands at 7.2% from the previous estimate of 7.8% in FY2023.

Deputy Governor in charge of monetary policy, Michael Patra said that the RBI’s policy still has the scope for accommodation. However, it needs to give up the ‘ultra-accommodative policy

“We had taken the policy rate to an all time low, which is 4 percent. If you adjust it for the target (4 percent), then the real policy rate was zero. That was ultra accommodation. Now that the situation is changing and inflation particularly is at risk, we want to withdraw the ultra-accommodation,” he said.

Effect on Market

The Indian equity market has outperformed its global peers in the last couple of years. This was mainly due to the support from the government and the central bank in the form of keeping interest rates low to promote borrowing, favoring growth over anything else, etc. However, the current stance of RBI is seen to be hawkish by the experts. 

The same is being reflected in the Indian equity market as well. It is not only about inflation but the Indian benchmark 10-year government yield also shot up to 7.12% recently, the highest since May 2019. Although the markets have not reacted to all these very sharply, the upcoming days are likely to make things clear for the investors.