'May take several years to close wide output gap': RBI MPC

After the monetary policy resolution, Reserve Bank of India (RBI) Governor Shaktikanta Das and Deputy Governors Michael Debabrata Patra and T Rabi Sankar spoke to the media on several issues, such as inflation growth dynamics, progress of the central bank digital currency (CBDC), and high core inflation. Edited excerpts:

Will the standing deposit facility (SDF) as an instrument be ever used?

Patra: The SDF will be used when needed. Currently, the RBI has several instruments in its arsenal. We have chosen to use those which are time-tested and market-friendly, such as auctions. SDF will not involve the exchange of collaterals. There might be reluctance to engage by market participants.

Is there an underestimation of the inflationary pressure?

Das: It will be unfair to compare India’s inflation dynamics to what is prevailing in advanced economies like the US. What is their inflation target and see where they are. So far as India is concerned, our target is 4 per cent (+/-2). We are projecting that in the fourth quarter (Q4) this year, it will go up. Subsequently for two successive quarters, it will be at 5 per cent. Hence, we are cognisant of the need to maintain price and financial stability.

Patra: Over the medium term, we see a peak in inflation in Q4 this year and then trending downwards. We are going to look at inflation in the range of 4–4.3 per cent by the end of 2022-23. The reaction to inflation always involves a sacrifice of growth. One must not shoot from the holster. When you see the inflation hump in sight and the progress of inflation towards the target in view, it gives us space to address concerns of growth.

When will we see the CBDC being launched?

Sankar: We are working on the types of CBDC. One is wholesale account-based; the other, retail account-based. A lot of work has been done on the wholesale account-based CBDC, but the retail account-based CBDC is complicated and will take some more time.

Are the concerns around inflation getting downplayed, compared to concerns on the growth front? When do you expect the output gap to close?

Patra: Our target is defined in terms of the headline Consumer Price Index-based inflation. We are at 4.3–4.5 per cent, which is broadly in alignment with the target. This gives us space to address issues relating to growth, which is really weak and needs a lot of support. Starting November reading, we are going to see a decline in core inflation due to excise duty cuts on petrol and diesel. The fuller effects of this will be seen in December, but the indirect effects will last for a full year. That will help to bring down core inflation. This also gives time to authorities to contemplate measures to bring down cost pressures that impact core. Currently, our assessment is that our output gap is very wide and it may take several years to close.