RBI Governor Allays Stagflation Fears, Says Ukraine War To Have Minimal Impact On India

The governor quickly admitted that the evolving situation is unimaginably uncertain now and forecasting for a year on growth or inflation is not an easy job for anyone.

New Delhi: Firmly ruling out the prospects of the economy falling into stagflation -- a situation of prices shooting over the roof and growth plunging -- Reserve Bank Governor Shaktikanta Das on Monday instead said prices are set to fall as the impact of the ongoing Ukraine war on the country seems to be minimal.

However, the governor quickly admitted that the evolving situation is unimaginably uncertain now and forecasting for a year on growth or inflation is not an easy job for anyone.

"As far as I can see, and as far as we see it in the Reserve Bank, the prospects of stagflation do not arise for us. In our assessment, such prospects don't exist for us at all as I think we are far away from such a grim prospect," Das told the CII national council meeting here this evening.

The statement from the monetary authority assumes importance as it comes amidst many analysts warning of the country plunging into a stagflation type scenario as prices of oil and key commodities are a record high since the Ukraine war has begun, and also for the second consecutive month, retail inflation printed at over 6 per cent.

While it came in at 6.07 per cent for February, the price index was at 6.01 per cent in January while wholesale inflation is at a multi-year high of over 13.5 per cent.

After hitting a 14 year high of USD 130 a barrel last week, the crude prices moderated to USD 100 a barrel now. But before the war began, the average price was only USD 93 a barrel. Similarly, other commodity prices have also been boiling scaling as much as 25-40 per cent.

And Das is basing his optimism on the flexible inflation targeting of 4 per cent with 2 per cent variation on either side, as against fixed inflation targeting in the US and many European nations.

So far as European and some advanced economies are concerned, we have to take into account what is their inflation target and where their inflation is now. The US, for example, has 2 per cent target. But today they are almost touching 8 per cent, which is a 40 year high. Similarly, in Europe, inflation is way above its target.

But for us, the target is 4 per cent, with plus or minus 2 per cent. Up to 6 per cent we are still within the range. Though last two months, it was has been 6 per cent, the governor said with a caveat that he is not offering any numbers as the monetary policy panel is about to meet for the first policy review of the new fiscal year.

Das has also credited the flexible inflation targeting mechanism with a 2-6 per cent band as the key enabler that has helped the RBI to provide all the monetary policy accommodation and reliefs in an unprecedented manner and quantum since the pandemic upended the economy since March 2020. The RBI has pumped a whopping Rs 17 lakh crore of liquidity to the system since March 2020.

"Instead, if it was just a 4 per cent, we'd not have had the flexibility to do most of the things which we had done in the past two years," he said.

Sounding confident of managing the price situation, Das said, We do expect inflation to moderate going forward. I don't see inflation going up beyond 6 per cent. In fact, our expectation was that it will moderate to 4.5 per cent, as the impact of the Ukraine war will be minimal on us.

But he quickly added that the RBI-MPC will spell out our inflation roadmap, what is the expectation and what is our estimate in the next monetary policy.

I don't see a situation for ourselves wherein inflation keeps on increasing the band. Our growth projection is 8.9 per cent for the current year, he said adding "even if one factor in the impact is Ukraine crisis, it will be very marginal."

Though I am not commenting on any numbers which we will leave for the next monetary policy meeting, he said I can't say any numbers today not just because of the MPC confidentiality but also because those numbers are still on the drawing board because the situation is unimaginably uncertain now.

If inflation crosses the 6 per cent mark for two consecutive quarters/six months, then the RBI and MPC are answerable to Parliament and the panel members have to resign as well. Since the MPC was set up in February 2017, inflation has not breached the tolerance level for more than three months.

There is no prospect of the economy falling into a stagflation vortex, Das told an industry gathering organised by the CII here this evening. Stagflation or recession-inflation is a situation in which prices rise too high but the economy slows or falls into a recession like situation and also unemployment jumps.

The RBI has retained the retail inflation projection for FY22 at 5.3 per cent, with the March quarter at 5.7 per cent on account of the unfavourable base effect. The central bank has projected retail inflation for FY23 at 4.5 per cent.

Similarly, wholesale price inflation in February rose to 13.11 per cent on hardening of prices of crude and non-food items, even though food articles softened.