The Indian economy is on a recovery path, but it still needs all the policy support it can get. Given the worrying turn in external economic environment, it is important that the ongoing recovery is expedited, and the festive season will be crucial in achieving this goal.
That’s the central message from the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which finished its customary bi-monthly meeting on October 8, and decided to leave the policy rate untouched and maintain a so-called “accommodative stance”, meaning that it will continue to push for growth. RBI also stuck to its forecast of 9.5% growth for 2021-22.
MPC also indicated that inflation is unlikely to be a cause for concern, though, for the second time this year, it pushed for a reduction in excise tariffs on fuel that have seen petrol prices exceed ₹100 in the country’s four largest cities (and in many other parts).
MPC’s decision counters the view—not just outside but even within the MPC—that RBI should have sent a stronger signal for normalisation of monetary policy by raising the so-called reverse-repo or doing away with the accommodative stance of monetary policy. The reverse repo is the rate at which RBI borrows from banks, and is widely considered an effective monetary tool to deal with situations of excess liquidity.
MPC has not made any changes to the reverse repo rate (3.35%) too; one external member of the MPC dissented against the decision on monetary policy stance, which was taken 5-1. However, by deciding to scrap its programme to acquire government bonds, and continue with its variable reverse repo rate auctions, RBI has sent a strong signal that it could exit its accommodative stance later this financial year or early next.
{{/usCountry}}MPC has not made any changes to the reverse repo rate (3.35%) too; one external member of the MPC dissented against the decision on monetary policy stance, which was taken 5-1. However, by deciding to scrap its programme to acquire government bonds, and continue with its variable reverse repo rate auctions, RBI has sent a strong signal that it could exit its accommodative stance later this financial year or early next.
{{/usCountry}}“As we further accelerate the pace of economic recovery, it is important not to rest in the glory of what has been achieved but work tirelessly on what remains to be done”, RBI governor Shaktikanta Das said.
MPC brought down its inflation projection from that made in August. Retail inflation or Consumer Price Index (CPI) growth is expected to be 5.3% in 2021-22, 40 basis points—one basis point is one hundredth of a percentage point—less than the 5.7% forecast in the August meeting.
The downward revision is on account of lower inflation in the quarters ending September and December 2021.To be sure, the moderation in inflation is largely on account of food prices.
“Weakening of food prices at a time when non-food prices are rising at a fast pace will further worsen the terms of trade against farmers. This is bound to put pressure on rural demand.”, said Himanshu, associate professor of economics at Jawaharlal Nehru University.
The MPC resolution, however, has also noted the upside risk from rise in crude oil, commodity and edible oil prices. The latest resolution reiterates the view that with “core inflation persisting at an elevated level” indirect taxes on petrol-diesel should be reduced to achieve “a more durable reduction in inflation and anchoring of inflation expectations”.
While MPC has left the GDP growth projection for 2021-22 unchanged at 9.5%, it has made an upward revision to its August growth projections for the September quarter (7.3% to 7.9%) and December (6.3% to 6.8%). To be sure, the MPC resolution clearly notes that the economy has still not achieved pre-pandemic levels.
“The outlook for aggregate demand is progressively improving but the slack is large: output is still below pre-Covid level and the recovery is uneven and critically dependent upon policy support”, the MPC resolution says. The resolution also hints that the festive season will be crucial for giving a sustained boost to economic activity.
There is also a reference to headwinds from external economic factors. “Even as the domestic economy is showing signs of mending, the external environment is turning more uncertain and challenging, with headwinds from slowing growth in some major Asian and advanced economies, steep jump in natural gas prices in the recent weeks and concerns emanating from normalisation of monetary policy in some major advanced economies. Against this backdrop, the ongoing domestic recovery needs to be nurtured assiduously through all policy channels”, the resolution says.
“All told, today’s policy measures were exactly as we had expected, on the rates, stance and the liquidity front”, said a note by Pranjul Bhandari at HSBC Securities and Capital Markets (India) Pvt Limited. “As written before, the steps on the G-SAP and VRRRs should push effective rates up sustainably and will likely be followed by reverse repo rate hikes (from 3.35% to 3.75%) over the December and February meetings. This, we think, will then be followed by a change in the stance from accommodative to neutral”, Bhandari added.