The no-action, status-quo monetary policy of the Reserve Bank of India (RBI) signals continuity with change.<\/p>\n
Let\u2019s take a\u00a0close\u00a0look at what has been continuing and what has changed.<\/p>\n
One, the accommodative stance of the monetary policy continues.<\/p>\n
The Monetary Policy Committee (MPC), RBI\u2019s rate-setting body, has unanimously decided to continue with the accommodative stance as long as necessary, while the key policy rates remain unchanged. It has also stuck to its data-based guidance as opposed to the\u00a0time-based guidance that it was giving till February.<\/p>\n
However,\u00a0one word has made a big change. This time it is saying the accommodative stance will continue for long\u00a0to\u00a0revive\u00a0<\/em>and sustain growth on a durable basis, while ensuring that inflation remains within the target, going forward.<\/p>\n In April, it had committed to continue with the accommodative stance as long as necessary to sustain growth on a durable basis while ensuring that inflation remains within the target going forward. This time, it is not only talking about\u00a0sustaining<\/em>\u00a0the growth but also\u00a0reviving\u00a0<\/em>it \u2013 bringing back the stance of the February policy.<\/p>\n This is an admission by the Indian central bank that the green shoots, which it had seen in April, aren\u2019t there anymore. The second wave of Covid-19 pandemic has attacked the economy badly.<\/p>\n Two, this has led to the second change in the policy.\u00a0Since the February MPC meeting, the RBI has been maintaining the projection for real GDP growth for fiscal year 2021-22 at 10.5 per cent \u2013 26.2 per cent in the first quarter; 8.3 per cent in the second; 5.4 per cent in third; and 6.2 per cent in the fourth.<\/p>\n Despite the disruption in the economy on account of the second Covid wave, its annual report, released last month, has stuck to the same projection even though every agency has been paring it. This time, the\u00a0RBI, too, has cut its growth projection to 9.5 per cent —\u00a0<\/strong>18.5 per cent in the first quarter; 7.9 per cent in second; 7.2 per cent in third; and 6.6 per cent in the fourth.<\/p>\n Look at the sharp downward revision of growth in the first quarter \u2013 shaving it off by a quarter. While vaccination holds the key, the RBI has also called for policy support from all quarters \u2013\u00a0including\u00a0\u00a0fiscal and monetary.<\/p>\n Three, while there is a one full percentage point cut in the growth projection, the inflation projection has been raised by just 10 basis points, from 5 per cent to 5.1 per cent. One basis point is a hundredth of a percentage point.<\/p>\n Even though\u00a0the wholesale price inflation climbed to an 11-year high of 10.49 per cent in April, after an eight-year high of 7.39 per cent in March, India’s consumer price index-based retail inflation eased to 4.29 per cent in April from 5.52 per cent in March, primarily due to reduction in food prices.\u00a0The RBI tracks retail inflation and\u00a0its mandate is to\u00a0maintain retail inflation between 2 per cent and 6 per cent.<\/p>\n The risks to the inflation projection are evenly balanced. While rising crude prices could put upward pressure, the lack of demand will even it out.<\/p>\n Four, there is continuity in the RBI\u2019s secondary market government securities acquisition programme, or G-SAP, but there\u2019s a change in its size. In April, it had announced a Rs1 trillion G-SAP 1.0 programme for the first quarter. This will continue in the second quarter but the size of the\u00a0G-SAP 2.0 has been raised to Rs1.2 trillion.<\/p>\n Despite this, the bond market was not exactly cheerful on Friday. Why? This is because the latest Rs40,000\u00a0crore\u00a0<\/strong>bond buying programme under G-SAP 1.0 on June 17, its third tranche, contains Rs10,000 crore purchase of state development loans.<\/p>\n One can presume that more state development loans will be included in G-SAP 2.0. Following this, the net buying of central government securities will be much less than Rs1.2 trillion.<\/p>\n The state loans have to be included in the bond buying programme\u00a0as<\/strong>\u00a0otherwise the spread between the yield of central and state government papers, which has been widening, will expand further.<\/p>\n Finally, the talk about unwinding or withdrawal of accommodation is no more on the RBI radar. It\u2019s unlikely to return in the near future. The RBI probably can\u2019t afford to talk on this during the current year when everyone is rushing to cut the growth projections at regular intervals.<\/p>\n","protected":false},"excerpt":{"rendered":" The no-action, status-quo monetary policy of the Reserve Bank of India (RBI) signals continuity with change. 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