There is no surprise in the script of Friday\u2019s no-action policy of the Reserve Bank of India (RBI), the last before the Union Budget in February.<\/p>\n
On expected lines, the banking regulator has accepted that the inflation will rise higher than its estimate and Indian economy will fare better than what it had anticipated in its October policy. Yet, it has continued with its accommodative stance \u2014 for now and even next year \u2014 and is ready to do anything to support growth, mauled by Covid-19 pandemic.<\/p>\n
The market was apprehensive of some measures to drain excess liquidity in the system, which has brought down the overnight rates below the RBI\u2019s reverse repo rate and distorted the short-term yield curve, but the RBI has refrained from doing so. Reverse repo is the rate at which commercial banks park their excess liquidity with the central bank. The repo rate (4 per cent) and reverse repo rate (3.35 per cent) \u2014 both at their historic lows \u2014 form the so-called liquidity adjustment facility corridor for the overnight rates.<\/p>\n
On the face of it, the ultra-loose monetary policy despite rising inflation and green shoots of recovery may sound a bit puzzling. But globally all central banks have been doing so. The RBI does not want to rock the boat and is buying time for growth. Action for tightening the stance, if any, is unlikely to happen before April 2021\u00a0at the earliest, if inflation remains high.<\/p>\n
Let\u2019s take a close look at key takeaways from the policy:<\/p>\n
There is no change in policy rates. The rate setting body of the Indian central bank \u201cunanimously\u201d decided to continue with the accommodative stance of monetary policy as long as necessary \u2014 at least through the current financial year and into the next year \u2014 to revive growth while ensuring that inflation remains within the target, going forward. In its October policy, one of the six members of the monetary policy committee was against such a long forward guidance.<\/p>\n
Retail inflation rose to 7.6 per cent in October 2020, the highest in six years and higher than all analysts\u2019 estimates. Observing that the price pressures are spreading, the RBI has admitted that the outlook for inflation has turned adverse relative to expectations in the last two months, and raised its inflation projection to 6.8 per cent for the December quarter and 5.8 per cent for the March quarter of financial year 2021, and 5.2-4.6 per cent in the first half of 2022, with risks broadly balanced.<\/p>\n
This is a bit higher than what the market had expected. In October, the RBI had projected 5.4-4.5 per cent inflation for the second half of 2021 and 4.3 per cent for the first quarter of 2022.<\/p>\n
On real GDP growth, the monetary policy committee (MPC) has found that along with the strong recovery in rural demand, urban demand has also been gaining momentum and business sentiment of manufacturing firms is improving. Although private investment continues to remain slack, real GDP growth could be -7.5 per cent in 2021.<\/p>\n
After 23.9 per cent and 7.5 per cent contraction in the first two quarters, respectively, the MPC expects the growth turning positive 0.1 per cent in the December quarter and 0.7 per cent in March quarter of 2021, leading to\u00a021.9- 6.5 per cent\u00a0growth in the first half of 2022. The October policy had expected 9.5 per cent contraction in GDP in 2021 (-5.6 per cent in December quarter and 0.5 per cent in March quarter).<\/p>\n
Despite higher inflation projection and tell-tale signs of growth returning to Indian economy, why has the RBI stuck to its accommodative stance even for\u00a0the next year?\u00a0<\/strong>Why has it not taken any step to suck out excess liquidity?\u00a0\u00a0For two reasons: The inflation is driven by supply-side issues, and the signs of recovery are far from being broad-based and dependent on sustained policy support.<\/p>\n The MPC feels that inflation will remain elevated, barring a \u201ctransient relief\u201d in the winter months from prices of perishables and this does not allow it to go for a rate cut now. In\u00a0the RBI\u2019s language, high inflation \u201cconstrains monetary policy at the current juncture from using the space available to act in support of growth\u201d.<\/p>\n Does this mean that the doors are still wide open for a rate cut next year? I don\u2019t think so. Look at what\u00a0the RBI has said: \u201cA small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes.\u201d Clearly, it has left the job of breaking the back of inflation to the government. If inflation is not contained, one cannot rule out tightening of the policy. But that will not happen before April 2021.<\/p>\n Bank stocks rose and the bond market rallied, relieved seeing no measure by the RBI to drain excess liquidity from the system. But the liquidity sugar rush may not be allowed to continue for very long.\u00a0The RBI is buying time for growth, for now.<\/p>\n","protected":false},"excerpt":{"rendered":" There is no surprise in the script of Friday\u2019s no-action policy of the Reserve Bank of India (RBI), the last before the Union Budget in…<\/p>\n","protected":false},"author":1,"featured_media":2868,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-2867","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles"],"acf":[],"_links":{"self":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/2867","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/comments?post=2867"}],"version-history":[{"count":1,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/2867\/revisions"}],"predecessor-version":[{"id":2869,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/2867\/revisions\/2869"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media\/2868"}],"wp:attachment":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media?parent=2867"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/categories?post=2867"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/tags?post=2867"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}