No sign of liquidity overhang, inflation should moderate ahead: RBI Guv

RBI has serious, major concerns about private cryptocurrencies from the point of view of financial stability

The Reserve Bank of India (RBI) does not see a possibility of a sustained rise in inflation above 6 per cent, and there is no evidence to suggest that the liquidity overhang in the system has fed into generalised inflation, Governor Shaktikanta Das on Thursday said.

The RBI Governor also said the central bank has “serious and major concerns” about private cryptocurrencies.

“We have serious concerns, major concerns from the point of view of financial stability. I think we need more credible answers as to what contribution private cryptocurrencies will make to the Indian economy going forward. We need to be convinced more, and we have expressed those concerns to the government. It is now for the government to take a decision,” Governor Das said in a conversation with Financial Times and Indian Express.

Inflation at 6 per cent is “a matter of concern,” Governor Das said, “but the possibility of sustained increase in inflation above 6 per cent is very less now.” Nevertheless, as inflation focused central bank, the RBI remains “watchful, and remain committed to achieve our medium term target (4 per cent) over a period of time in a very non-disruptive manner.”

The central bank took an exception to focus on growth more, instead of trying to bring down inflation, during the pandemic year.

“We are monitoring the situation very closely. RBI is an inflation focused organisation, but in the pandemic time we have decided to focus on growth. Instead of the target of 4 per cent, the monetary policy committee (MPC) has decided to operate within the band of 2-6 per cent,” Governor Das said in the event, streamed online.

Governor Das also did not see any evidence of high asset prices, such as stock prices feeding into inflation. “Our expectation is that from now onwards inflation will moderate.”

Most of the recent perk up in inflation was because of supply side reasons, such as high pump prices of petrol and diesel, edible oil and pulses prices. The RBI is in constant touch with the government on these matters and the latter has taken steps to correct the food prices.

Governor Das expressed his confidence about meeting the central bank’s growth projection of 9.5 per cent for the current fiscal. Base effect will help, but “it all depends on the severity of the third wave of the pandemic should it happen.” The country is better prepared now with covid protocols in place.

Both the RBI and the government are in touch with each other to take measures to mitigate covid stress. The RBI’s accommodative stance started even before the pandemic set in because the growth was faltering. Now, “whether we will continue with the accommodative stance is something that the MPC will take a call,” Governor Das said. However, he also said that given the growth concerns, it is not a good time now to withdraw accommodations.

Currently, the banking sector NPA looks “quite manageable,” as the gross bad debts at the end of June came at 7.5 per cent of the advances for the banks. Non-banking financial companies (NBFC) registered little less bad debts. However, both the sectors are adequately capitalised after the RBI nudged them to raise money from the markets on a proactive basis.

The credit growth in the system, though, continues to be low primarily because of the uncertainty, and the corporate willingness to deleverage.

“They have investment plans, but there’s a lot of slack in capacity utilisation and demand. Aggregate demand is still below the pre-pandemic level,” he said.

The RBI governor also said that the central bank has given feedback to the government to enact legislations that would expedite admissions of cases for insolvency proceedings. The Insolvency and Bankruptcy Code (IBC) is still faster than other modes of resolution, but there is scope for further improvement, he said. The effort continues to remain that the entity under resolution continues as a business concern.