RBI Deputy Governor Michael Patra on Friday said supply-side issues, including profit maximisation at retailers' end, are hurting the inflation situation, which has breached the central bank's comfort level in the past few months. There is a window for cooling off in prices presented by the softness in vegetable prices in winters and arrivals of the kharif or summer crop, Patra said affirming that the RBI is watchful of the demand-side issues.
Earlier in the day, RBI Governor Shaktikanta Das said the inflation trajectory has not panned as per the central bank's expectations and upped its target for the price rise situation in the next one year.
"At current time, our assessment is that the large part of inflation pressures are emanating out of supply-side disruptions (like) at the level of retailer, very high margins being charged by the retailers and some amount of indirect taxes," Patra told reporters.
Pointing to the two points that can soften the prices, he added, "if supply side management is timely and effective, you will see the trajectory of inflation completely changing."
The director general said the guidance given by the governor says the window is a chance for supply-side management which is the prime instrument to use at this juncture to produce a different trajectory of inflation.
Meanwhile, Das said there is no plan to take the Wholesale Price Index-bases inflation as an anchor for determining monetary policy, and added that the central bank will continue to stick to the current Consumer Price Index-based inflation.
In the remarks, which come ahead of a new framework to be adopted by the RBI on inflation targeting, Das also said the final call on this will be taken by the government, which will guide the RBI in the medium term.
The governor also said the inflation targeting, which finds a place in the RBI Act, continues to be an important aspect for the central bank.
Currently, the RBI is contract bound to get the inflation at 4 per cent as part of a medium-term framework which gets over in March 2021. The central bank has a two percentage point leeway on either side and has to explain if the price rise situation misses the 2-6 per cent level for over six months in a row. In September, the headline inflation came at 7.3 per cent and the same increased to 7.6 per cent in October.
On liquidity, Patra said the Monetary Policy Committee has adopted an accommodative stance and has given a time-bound guidance on the same.
He acknowledged that excess liquidity can sow the seeds of inflation but said the RBI is keeping a careful and close watch on liquidity situation for this.
On the foreign exchange strategies, Das said the RBI's function is to ensure that there is no volatility in the market and the high quantum of foreign portfolio investment and foreign direct investment flows are smoothly absorbed.
When asked if more asset quality difficulties should be expected at banks, Das said the RBI has done its internal assessments and is looking forward to the final judgement from the Supreme Court on ways to recognise the stress induced by the COVID-19 pandemic.
The half-yearly financial stability report (FSR) will come up with the expectations at the end of this month, Das said. The economy has rebounded better than what was expected while preparing the last FSR in March, he added.