With its priorities shifting to fighting surging inflation in the wake of the Russia-Ukraine war, the RBI, in view of the growing uncertainties, has raised its inflation forecast for the current fiscal year to 5.7%, 120 basis points above its forecast in February, while cutting its economic growth forecast to 7.2% for 2022/23 from 7.8%.
"We have now put inflation before growth. So that is the sequence of our priorities - first is inflation followed by growth," RBI Governor Shaktikanta Das said, adding that this was the first time in three years that the RBI was putting inflation in the forefront.
Inflation has held above the RBI's 6% upper threshold so far this year, casting doubt on its strategy of keeping rates low to bolster growth even as some other central banks are already raising borrowing costs to tamp down price pressures.
In a surprise move, the central bank also said it would restore its liquidity adjustment facility corridor to pre-crisis levels, which was seen as a first step to moving away from emergency measures embraced during the COVID-19 pandemic.
The RBI also said it is starting to move away from its ultra-loose monetary policy even as it kept its key lending rate at a record low. Analysts and traders are now broadly expecting the central bank to change its 'accommodative' stance to neutral at its next policy meeting in June, with interest rate increases starting sooner rather than later.
But with global growth risks also rising, Das sought to reassure financial markets that the process of returning policy settings to more normal levels would be gradual.
"The conflict in Europe has the potential to derail the global economy caught in the crosscurrent of multiple headwinds. Our approach needs to be cautious, but proactive in mitigating the adverse impact on India's growth and inflation," Das said after the policy decision.
Inflation has held above the RBI's 6% upper threshold so far this year, casting doubt on its strategy of keeping rates low to bolster growth even as some other central banks are already raising borrowing costs to tamp down price pressures.
