The Reserve Bank of India (RBI) has steadfastly provided monetary accommodation to help the economy weather the COVID-19 pandemic, high inflation notwithstanding. Yet, financial markets have been dreading the eventuality of inflation forcing the central bank to withdraw some of the stimuli it has supplied through surplus liquidity in the banking system.
Indranil Pan, the f economist at IDFC First Bank, is of the view that the cue for the RBI to pull back monetary accommodation would be a revival of demand in the economy, amid insufficient abatement of supply-side pressures that have been pushing up inflation for the last six months.
In an interview with Cogencis, Indranil Pan told, "But, I think the RBI would want to delay these measures as much as possible, and would only want to do it if there are indications that the demand is picking up in a way that it is outdoing the supply. If the demand side starts to improve and the supply side lags behind, that is the point when they would want to take incremental action."
Since March, the RBI has lowered its repo rate by 115 basis points and the reverse repo rate by 155 bps, while supplementing these rate cuts with large doses of liquidity injections in the banking system. During this period, headline inflation based on the Consumer Price Index averaged 6.75%, exceeding the upper end of the RBI's target range of 2-6%.
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