A flexible monetary policy aided economic recovery from the pandemic: Dr Patra, RBI Deputy Governor 

New Delhi: The flexibility imparted by the monetary policy framework coupled with astute judgement healed the economy and helped it rebound from the pandemic, said Dr Michael Patra, Deputy Governor, RBI, underscoring the importance of flexible inflation targeting (FIT) framework as its monetary policy regime. He added that the congenial financial conditions engendered by monetary policy helped to revive the economy. Dr Patra was speaking at the 12th Financial Markets Summit organised virtually today.

Dr Patra suggested that global financial markets are now out of sync with the real economy, due to extensive fiscal and monetary support provided over a long period time. “Under these conditions, monetary policy stances and actions are diverging widely and this by itself is imparting uncertainty in a high-wire situation”, he added. In India, the economic rebound from the second wave is being supported by the monetary policy stance of ‘as long as necessary’ accommodation which is reflected in ample liquidity in the system.

The Deputy Governor clarified that the announcement of graduated time path for variable rate reverse repo (VRRR) auctions cannot be construed as a liquidity tightening measure, “The RBI will remain in surplus mode and the liquidity management framework will continue in absorption mode”, he said. In the wake of weak credit channel of monetary transmission, RBI remains committed to provide easy access to finance to the corporate and government at low interest rates. This has been facilitated by an asymmetric adjustment to the reverse repo rate relative to the repo rate, thus employing the LAF corridor itself as an instrument of policy by running it in absorption mode, he further added.

On the way forward path for the economy, Dr Patra elucidated that economic recovery remains on track as reflected in the trend of the production & order books. RBI’s growth target of 9.5% for the full year is imminently achievable. On inflation, he highlighted that the current inflationary pressures are largely driven by supply shock with contributions to inflation emanating from a narrow group of goods. However, he forewarned that the pass-through of imported price pressures to retail prices remains incomplete which along with the second order effects of rising staff costs in the organised sector will lend some tail risks to inflation trajectory.

With MPC remaining firmly committed to price stability, the RBI envisages a glide-path of CPI inflation printing at 5.7% or lower in the current year, to below 5.0% in 2022-23 and closer to the target of 4.0% by 2023-24, Dr Patra highlighted.

In his opening remarks, Mr Vishal Kampani, Co-Chairman, CII National Committee on Financial Markets and Managing Director, JM Financial Ltd stressed that in a post pandemic scenario, Indian financial markets will need to play a productive role of providing the necessary risk capital to fund growth. In the same vein, he highlighted that to meet the investment requirements of infrastructure development in the economy, the banking capital needs to supplemented by alternative sources which will entail deepening of the debt markets.