There is no surprise in the outcome of the three-day meeting of the Monetary Policy Committee (MPC) that ended on Friday.<\/p>\n
Based on \u201can assessment of the evolving domestic and global macroeconomic and financial conditions and the outlook\u201d, the Indian central bank\u2019s rate-setting body has kept the policy rates unchanged.\u00a0The decision is unanimous. It is also in favour of continuing with the accommodative stance \u201cas long as necessary\u201d to \u201crevive and sustain growth on a durable basis\u201d. Just one of the six members of the MPC did not support this.<\/p>\n
Still, the subtext of this policy is a bit different from the June policy. The Reserve Bank of India (RBI) sounds relatively more confident on growth now and, at the same time, its concerns on inflation are clearly higher. In fact, it has raised its inflation projection for the year, closer to the upper end of the band that the MPC is targeting.<\/p>\n
This \u2013 along with the doubling of size of the 14-day variable rate reverse repo, or VRRR, auctions, from Rs2 trillion to Rs4 trillion in the second quarter of the financial year \u2013 may encourage some of us to interpret the latest policy as a soft signal to return to normalcy. This is why the 10-year bond yield rose 4 basis points to close at 6.243 per cent (previous close was 6.207).\u00a0A basis point is a hundredth of a percentage point.<\/p>\n
RBI Governor Shaktikanta Das has, however, strongly emphasised that the increase in the size of the auction should not be read this way; it\u2019s nothing but a tool for liquidity management.<\/p>\n
The excess liquidity in the system is at its historic high now \u2013 around Rs11 trillion. Among others, the combination of RBI\u2019s secondary market G-sec acquisition programme (G-SAP) and redemptions of a bunch of short-term treasury bills in the second quarter will ensure that the liquidity sugar rush continues to flood the system.<\/p>\n
The VRRR, kept in abeyance during the pandemic, was re-introduced in January, and since then the Rs2 trillion absorbed through this window is being rolled over every fortnight. The RBI has now decided to ramp up the size of the VRRR auction in phases to Rs4 trillion by the second half of September. This is parallel to the fixed rate daily reverse repo window where banks earn 3.35 per cent for keeping excess money with the RBI.<\/p>\n
Sounding more bullish on growth, the policy statement says the domestic economic activity has started normalising with the second wave of the pandemic ebbing; and although there is no rise in investment demand, better capacity utilisation, rising steel consumption and higher imports of capital goods, among others, should kick-start a \u201clong-awaited revival\u201d. It has kept its real GDP growth projection unchanged at 9.5 per cent for fiscal year 2022. For the first quarter of fiscal year 2023, the real GDP growth estimate is pegged at 17.2 per cent.<\/p>\n
Like many other central bankers, the RBI Governor has maintained the stance that driven by supply shocks, inflation is transitory; but the inflation projection of the year has been raised substantially, from 5.1 per cent to 5.7 per cent \u201cwith risks broadly balanced\u201d. Even for the first quarter of fiscal 2023, the RBI projection for inflation is 5.1 per cent, that too on a relatively high base. The MPC\u2019s inflation target is 4 per cent with a 2 percentage-point band on either side.<\/p>\n
Clearly, the MPC is aware that the threat of inflation is real. At the\u00a0same time, the green shoots in Asia\u2019s third largest economy seem to be showing. If both the trends continue, the RBI will be left with no choice but to start unwinding the super-accommodative stance of the monetary policy sooner than later. It is bound to start doing so by February 2023, if not in December 2022.<\/strong><\/p>\n The policy statement says the MPC is conscious of its mandate of anchoring inflation expectations and will act as soon as the prospects for strong and sustainable growth are assured. For the time being, the RBI remains in \u201cwhatever it takes\u201d mode, with a readiness to deploy all its policy levers \u2013 monetary, prudential or regulatory \u2013 to nurture the \u201cnascent and hesitant recovery\u201d.<\/p>\n","protected":false},"excerpt":{"rendered":" There is no surprise in the outcome of the three-day meeting of the Monetary Policy Committee (MPC) that ended on Friday. Based on \u201can assessment…<\/p>\n","protected":false},"author":1,"featured_media":3053,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3052","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\/3052","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=3052"}],"version-history":[{"count":1,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3052\/revisions"}],"predecessor-version":[{"id":3054,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3052\/revisions\/3054"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media\/3053"}],"wp:attachment":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media?parent=3052"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/categories?post=3052"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/tags?post=3052"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}