Das made the remarks while opening his post-policy presser. Continuing with withdrawal of ‘accommodative’ stance, RBI’s rate-setting panel on Friday increased the benchmark rate by 50 basis points, in a bid to bring inflation to its comfort zone and in line with aggressive policy tightening by key global central banks.
The third straight hike took the overall increase in the federal fund rates by 190 bps to 5.90 per cent – the highest since April 2019. The MPC-RBI also lowered the growth forecast for the second time to 7 per cent – down from 7.8 per cent in April and 7.2 per cent in August.
“In the last two and a half years, the world has witnessed two major shocks– the Covid-19 pandemic and the conflict in Ukraine. These shocks have produced profound impact on the global economy. As if that was not enough, now we are in the midst of a third major shock -a storm -arising from aggressive monetary policy actions and even more aggressive communication from advanced economy central banks like the US Fed,” Das said in his policy address.
Das said that while advanced economies’ actions are driven by their domestic considerations, emerging markets suffer the consequences due to global spillovers
“While the necessity of such actions is driven by their domestic considerations, in a highly integrated global financial system, they inevitably cause negative externalities through global spillovers and we in the emerging markets will have to suffer the consequences,” the RBI governor said, adding: “we aren’t blaming them for what they are reacting to their domestic imperatives and we will have to deal with the spillovers.”
Das also said that all segments of the financial market including equity, bond and currencies are in turmoil across the globe.
” There is nervousness in financial markets with potential consequences for the real economy and financial stability,” Das said.
However, Das exuded confidence about the domestic economic situation, saying the economy continues to be resilient.
“There is macroeconomic stability our financial system remains intact, with improved performance parameters. We have withstood the shocks from the pandemic and the Ukraine conflict,” he said.
Das also said that when currencies are in a free fall, imported inflation is an inevitable eventuality and the world is facing the same thing now and our forward guidance on prices factors in this aspect.
The third shock has been accentuated by the advanced economy central banks steeply hiking rates and making forward guidance of sharper hikes which have already roiled the global financial markets creating excessive volatility in global currency markets, he said.
Meanwhile, deputy governor Michael Patra, while talking about economic growth, said that barring the Q1 negative surprise, we believe in the latest NSO numbers/projections.
“We also see all the high-frequency indicators are gaining traction and we hope to see the economy maintaining the present momentum into the second half,” he said.
Patra said that the late recovery in Kharif sowing, the comfortable reservoir levels, improvement in capacity utilisation, buoyant bank credit expansion (16.5 per cent at the latest reading) and government’s continued thrust on capex are expected to support aggregate demand and output in H2.
Das also allayed fears of any tight liquidity conditions and assured of adequate liquidity, saying the economy has entered the bust credit season and the central bank will continue to fine-tune liquidity in both directions.
“Liquidity is not tight at all. Net LAF continues to be in surplus for more than the past two years to the tune of around Rs 5 lakh crore, except for two-three primary dealers, when their standing LAF had a crisis. But let me assure you there should not be any worry about tight liquidity. We will continue to keep the system liquid enough,” Das said.
His deputy Patra joined in saying banks are holding excess CRR and SLR and they continue to draw from them as credit demand is higher than deposit mobilisation. Also, there is a temporary move of liquidity from the system and has moved into a different basket because of high GST and direct tax collections in September. Also, from the second quarter onwards and through the second half, the Centre and states normally spend much higher.
“We expect liquidity to normalize in October itself as the present tightness is due to balance sheet adjustments by corporates,” Patra said.
(With inputs from PTI)