Premature liquidity roll-back will hit growth: RBI governor Shaktikanta Das

NEW DELHI:  The Reserve Bank of India at its Monetary Policy Committee meeting held in the first week of December not only voted to maintain the status quo on interest rates fearing higher levels of inflation if they were lowered, it also decided against the withdrawal of the liquidity measures fearing that this could hit nascent growth.

"A premature roll back of the monetary and liquidity policies of RBI would be detrimental to the nascent recovery and growth. The overall situation needs to be monitored carefully, both in the sides of growth and inflation," governor Shaktikanta Das noted at the meeting, minutes released on Friday showed.

Domestic financial conditions remained easy in October-November and systemic liquidity continued to be in large surplus after the RBI pumped in liquidity, including Rs 1 lakh crore through longer-than-overnight lending to banks.

Reserve money, or the currency in circulation plus bankers' and others' deposits, with the RBI increased by 15.3 per cent year-on-year and non-food credit moved into positive territory for the first time since April in November. 

Many had raised apprehensions that RBI's policies of pumping liquidity into a market where industrial credit was not being picked up by corporates and of buying dollars - which was also releasing more Indian currency into the market - could prove inflationary.

Retail inflation rose sharply to 7.3 per cent in September and 7.6 per cent in October 2020. Not only did food inflation rise, but core inflation or non-food, non-fuel inflation also rose by 5.8 per cent in October.   Other MPC members seemed to support Das.

Mridul K Saggar said, "Fiscal impulse has weakened since the second quarter and, therefore, despite inflation persistence, pulling back monetary support to aggregate demand will not be an apt choice at this juncture."

However, the members also noted that the big difference of 6.1 per cent between retail and wholesale inflation was because of the huge retail margins being charged and high taxes imposed by the government on petroleum products and alcoholic beverages.