By Swati Bhat
MUMBAI (Reuters) - Inflation in India is likely to ease only gradually, Reserve Bank of India Deputy Governor Michael Patra said on Thursday, adding that the outlook on growth and inflation will help determine the future course of monetary policy.
The Indian economy is emerging from the second wave in a more resilient manner as compared with the first, Patra said, adding that recovery was more broad-based around manufacturing as a pivot, though output is still below pre-pandemic levels.
He said the need to revive and sustain growth on a durable basis while keeping inflation in check warrants monetary policy accommodation, and that is mirrored in the high systemic liquidity and easy financial conditions.
"We don't like tantrums. We like tepid and transparent transitions – glide paths rather than crash landings," Patra said at an event organised by the Confederation of Indian Industry.
He said the analysis of inflation dynamics indicates that the easing of headline inflation from current levels is likely to be "grudging and uneven".
"Inflationary pressures are largely driven by supply shocks. Although shocks of this type are typically transitory, the repetitive incidence of shocks is giving inflation a persistent character."
Consumer prices in August rose 5.30% from a year-ago period, but eased from July's 5.59% rate.
"The course of monetary policy will be shaped by the manner in which the outlook for growth and inflation evolves," Patra said.
"It is our hope that credit demand will recover and banks will get back to their core function of financial intermediation as soon as they can. This is the natural and the RBI-preferred manner in which (rupee) surpluses ... can be reduced," he said.
The RBI's decision to conduct variable rate reverse repo auctions had pushed bond yields higher as markets saw it as a harbinger to liquidity withdrawal and eventual rate increases.
"It is not, and I would emphasize this, it is not a signal either for withdrawal of liquidity or of lift-off of interest rates. Signals of the latter will be conveyed through the stance that is articulated by the MPC (monetary policy committee) in its future resolutions," Patra said.
(Reporting by Swati Bhat; Editing by Sherry Jacob-Phillips)