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RBI Gov Shaktikanta Das: Recovery of aggregate demand hinges on private investment, is still lagging

"Downside risks to the outlook have risen with the emergence of Omicron and renewed surges of COVID-19 infections in a number of countries," RBI governor said.

December 08, 2021 11:22 IST | India Infoline News Service
Shaktikanta Das
Dwelling briefly on the Monetary Policy Committee's (MPC) rationale for maintaining a status quo in policy repo rate and stance during the fifth bi-monthly monetary policy for FY22, the Reserve Bank of India (RBI) governor Shaktikanta Das said that the MPC regarded the accentuation of headwinds emanating from global developments as the main risk to the domestic outlook, which is now somewhat clouded by the Omicron variant of COVID-19.

In his statement, the RBI governor said, "noting that economic activity is broadly evolving in line with its assessment in October, the MPC was of the view that the sharp and sustained reduction in new COVID-19 infections and the rise in vaccination coverage are contributing to consumer confidence and business optimism. The prospects for economic activity are steadily improving, including for contact-intensive services that were hit hard by the pandemic. The MPC noted the supply-side measures taken by the government to contain food prices as also the calibrated reductions in central excise duties and state VAT (value-added taxes) on petrol and diesel. Crude oil prices have also softened since end-November."

"These would alleviate, to an extent, the domestic cost-push build-up," Das added.

However, the RBI governor outlined that "the recovery of aggregate demand hinges on private investment, which is still lagging."

He said that the MPC regarded the accentuation of headwinds emanating from global developments as the main risk to the domestic outlook, which is now somewhat clouded by the Omicron variant of COVID-19.

Moreover, the central bank chief said that "given the slack in the economy and the ongoing catching-up of activity, especially of private consumption, which is still below its pre-pandemic levels, continued policy support is warranted for a durable and broad-based recovery. Against this backdrop, the MPC decided to retain the prevailing repo rate at 4% and continue with the accommodative stance."

On GDP growth, Das said that overall, "the recovery that had been interrupted by the second wave of the pandemic is regaining traction, but it is not yet strong enough to be self-sustaining and durable. This underscores the vital importance of continued policy support."

"Downside risks to the outlook have risen with the emergence of Omicron and renewed surges of COVID-19 infections in a number of countries. Besides, notwithstanding some recent corrections, headwinds continue to be posed by elevated international energy and commodity prices, potential volatility in global financial markets due to a faster normalisation of monetary policy in advanced economies, and prolonged global supply bottlenecks," Das said.

On RBI's inflation target, Das said that "over the rest of the year, inflation prints are likely to be somewhat higher as base effects turn adverse; however, it is expected that headline inflation will peak
in Q4:2021-22 and soften thereafter."

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