Signalling optimism: On RBI holding rates

The RBI has clearly sought to talk up confidence ignoring the risks of inflation

RBI Governor Shaktikanta Das went to great lengths to emphasise that the current ‘inflation hump’ was a transient phenomenon that needed to be looked through when taking measures to support the ‘emerging impulses’ and helping the economy return to its feet. Through a series of liquidity enhancing and credit flow supportive steps, the central bank reiterated its commitment to maintaining stability in the financial markets, at a time when the resources-strapped Central and State governments are expected to resort to substantially higher levels of borrowing to meet their spending needs. There can certainly be no argument at this point that the economy needs all the support it can get to recover from its 23.9% estimated contraction of the first quarter. The RBI sees a gradual recovery, forecasting a marginal growth of 0.5% in the fourth quarter that would narrow the full-year contraction to 9.5%. It is the inflation assumptions, however, that cause disquiet. From a projection of 6.8% for Q2, CPI inflation is posited to sharply ease — 5.4% in Q3 and 4.5% in Q4. In overlooking the risks that the persistence of supply bottlenecks, cost-push pressures from higher taxes on transport fuels and the possibility of food-price inflation becoming entrenched pose to the outlook on prices, the RBI has clearly sought to talk up confidence.

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