RBI’s optimistic economic view
On Friday, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) announced its decision to keep policy rates and the monetary policy stance unchanged. This was not surprising. But the more significant part of the MPC resolution was its assessment of the macro-economy going forward. The Gross Domestic Product growth is expected to reach 10.5% in 2021-22, in sync with the 14.4% nominal growth projected in the budget. RBI governor Shaktikanta Das was also categorical in saying that the economy has bottomed out.
What is worth underlining is the fact that both the government and RBI have decided against withdrawing support measures even though they see a robust recovery underway. In fact, there is growing evidence that such support is being carefully recalibrated to achieve specific ends. The budget’s focus on capital expenditure is one such example. Similarly, RBI has allowed banks to deduct loans made to micro, small and medium enterprises from their cash reserve ratio requirements. When read with the fact that most experts believe that it is the larger, more credit-worthy borrowers who have gained from the cheap credit environment post-Covid-19, this seems like a conscious effort to tilt the scales in favour of the smaller players. Similarly, both fiscal and monetary policy are exploring hitherto uncharted areas of resource mobilisation. The government is planning to monetise brownfield assets, while RBI has allowed retail investors to invest directly in government bonds. While the results of such moves will need to be tracked, they are, at least in principle, game-changing policies. The importance of such synergy in policymaking cannot be over-emphasised at the moment.
To be sure, results from RBI’s latest forward- looking surveys also highlight the need to guard against any complacency on the economic front. While its business expectations surveys, like other high-frequency indicators such as PMIs, paint an image of robust recovery, consumer confidence continues to be weak and much below pre-Covid-19 levels. Because India does not have high frequency official data on consumer spending or employment, any such distress can go undetected for months. Both monetary and fiscal policy will do well to guard against ignoring such distress. MPC has reiterated its commitment to prioritising growth is reassuring on this count.