Reserve Bank of India Governor Shaktikanta Das on Monday said expectations of a rate hike are a no-brainer as inflation is a major area of concern even as economic recovery is steady and gaining further traction.

This comment comes in the backdrop of his April 2022 observations that the central bank’s sequence of priority is inflation first and after that growth.

“RBI would like to raise the rates in the next few meetings. In the next meeting at least, “Das said in an interview to CNBC-TV18.

Taming inflation

In response to a question on whether the RBI and the government are acting in tandem to tame inflation, the Governor emphasised that the fiscal and monetary authorities have entered into another phase of coordinated action.

He said the recent actions of the RBI, which hiked the repo rate from 4 per cent to 4.40 per cent on May 4th in an off-cycle meeting, and the government, which recently cut tax on motor fuels, gave subsidy on cooking gas and reduced duty on imports of certain raw materials, will have sobering impact on inflation.

Das observed that the inflation number is on the drawing board of RBI almost everyday and the revised number, keeping in view the Government measures, if any, will be given after the next monetary policy committee (MPC) meeting, scheduled from June 6 to June 8.

The Governor said liquidity conditions will be normalised over a multi-year (two-three year) time cycle even as he underscored the need to have adequate liquidity to support credit offtake.

Avoiding liquidity trap

Das underscored that RBI wants to avoid a liquidity trap or getting into a “chakravyuh” (spinning wheel military formation referred to in the Mahabharata, where a warrior gets trapped in a maze and cannot escape) kind of scenario. 

Das said there is no one-to-one correlation between an increase in government expenditure and borrowing.

This observation is significant as analysts expect fiscal deficit to widen in FY23 following the recent tax cuts on motor fuels, cooking gas subsidies and duty cuts on imports to alleviate price rise.

Das said the RBI will be able to manage and fund the current account deficit (CAD) comfortably this year.

While the export sector continues to be very strong, the Governor highlighted that the step up in imports is reflective of a pick-up in demand.