The inflation was below the RBI’s projection of 4%, the MPC focused on its commitment to keeping headline inflation close to 4%. “The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility,” stated RBI.
Even as surplus liquidity in the banking system post-demonetisation was drained by the ramping up of new currency in circulation by Rs 1.5 trillion in April and May, massive spending by the Government re-injected liquidity into the system, raising the daily average overall surplus liquidity in the banking system to Rs 4.2 trillion in April and Rs 3.5 trillion in May. Therefore, banks are dealing with surplus liquidity.
The MPC noted the transitory effects of demonetisation lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals. “At the same time, however, the CSO’s latest releases on national income accounts and industrial production attest to the effects of demonetisation on the broader economy being sector specific and transient, as well as to the noteworthy resilience of private consumption. At this stage, it is difficult to isolate these factors or to judge the strength of their persistence,” the RBI stated.
The Indian economy at present underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks.
The central bank stated, “The Reserve Bank will continue to work in partnership with the government to address the stress in banks’ balance sheets. Better alignment of administered interest rates on small savings with market rates and stepped-up recapitalisation of banks to facilitate adequate flow of credit to productive sectors are important steps to follow through.”