Governor Shaktikanta Das said that the rise in prices is due to supply side shocks as the effect of lockdowns and restrictions in movements across the country.
“As supply chains are restored, these wedges should dissipate,” Das said in his policy statement. “The MPC has hence decided to look through the current inflation hump as transient and address the more urgent need to revive growth and mitigate the impact of COVID-19.”
This has provided the space for continuing with the accommodative stance with forward guidance as set out in the MPC’s resolution.
“We continue to expect discussion on rate cuts to be back on the table later during the year as inflation prints start softening,” said Siddhartha Sanyal, chief economist at Bandhan Bank.
The Governor exudes confidence of a quick economic revival despite predicting a 9.5% contraction in GDP in FY21. “Several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth,” he said.
The forward-looking assessment on growth suggested that the worst was behind the economy, citing the ‘September surprise’ posed by incoming indicators, said Radhika Rao, economist with DBS Bank. “These comments suggest that the policymakers have not yet shut the door on further policy easing,” she said.
In the September 2020 round of the RBI’s survey, households expect inflation to decline modestly over the next three months. The inflation-targeting central bank aims to keep the Consumer Price Index at 4%, with a room to move in a two percentage point band on either side.
Higher food prices pushed the CPI above 6% for the last five months.
Das said that silver linings are visible in the flattening of the active caseload curve across the country. “Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory. In this environment, the focus must now shift from containment to revival.”