The Reserve Bank of India’s (RBI) monetary policy on Friday stuck to the expected script, with a slight surprise of an enhanced outlay for its G-SAP (government security acquisition programme). The central bank maintained the status quo on its policy rates and announced fresh measures to ensure cheap liquidity supply (especially, this time round, to contact-service industries). The monetary policy panel decided unanimously to leave the repo rate, or the rate at which RBI lends overnight funds to banks, unchanged at 4%. The reverse repo rate, or the interest it pays on surplus funds absorbed from banks, was left unchanged at 3.35%. So long as the covid pandemic casts a shadow of uncertainty on our economy, credit conditions will continue to need RBI support. A second wave of infections has come in the way of a return to normalcy, and the central bank’s concern over its impact is reflected in the downgrade of its forecast for 2021-22’s growth in gross domestic product (GDP). It has been revised to 9.5% this fiscal year, down from 10.5% previously. The trajectory our economy takes would depend not just on quelling the second wave (which is thankfully off its peak and in decline), but guarding against a potential third one, now that it’s getting clearer that the virus’s Delta variant represents a bigger threat than estimated earlier. The possibility of more waves would mean that covid curbs will have to persist and large parts of our economy will function in fits-and-starts.
A threat also looms in inflation. Firming global crude oil prices and reviving demand in Western economies risk spilling over to our economy in the form of price pressures. At 5.1% for 2021-22, the central bank’s latest retail inflation forecast is well over its 4% medium-term target. This warrants a close watch. Should price levels threaten to go out of control, RBI may be compelled to revisit its accommodative policy stance that has so far kept credit cheap. Bond markets, which have seen yields edge up in line with inflation worries, would be pleased to see RBI put a clear figure out for its G-SAP budget for the second quarter of 2021-22. The central bank plans to snap up government securities worth ₹1.2 trillion over those three months, up from its ₹1 trillion outlay for the first quarter (some ₹40,000 crore of which is yet to be spent this month). With RBI committed to loading up its balance sheet, as part of what’s being called its very own version of quantitative easing, bond traders would be reassured that yields will be held in check. Unless, of course, inflation were to break out.
The impact of overseas trends also needs to be kept under watch, as the US central bank slowly begins to unwind a few of its extraordinary covid provisions. Dollar inflows and outflows may follow a different pattern from what was seen last year, and RBI may have to grapple with ‘impossible trinity’ trade-offs accordingly.
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