TOPIC – RBI’s balancing act
“It maintains status quo on rates, announces measures to support bond market. It must be mindful of inflation.”
In line with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted unanimously in its first policy meeting of the current financial year to leave the benchmark policy repo rate unchanged. The committee also decided to maintain its accommodative stance until “the prospects of the recovery are well secured”. Considering that the second wave of COVID-19 infections has created significant uncertainty over the economic trajectory going forward, even as retail inflation is expected to remain elevated in the near future, the MPC, by shifting from a “time-based” to a “state-based” forward guidance, has given itself more room for manoeuvre. Alongside, the RBI governor, Shaktikanta Das, announced a slew of measures aimed at easing financial conditions and lowering borrowing costs. Das announced a G-sec acquisition programme (G-SAP) through which the central bank will purchase Rs 1 lakh crore of government securities in the first quarter of the current financial year, expanding on the existing toolkit for managing long-term yields. The programme, which is meant to signal the central bank’s intention of supporting the bond market, will help calm the markets, and bring down the term premium. By laying out what is essentially a calendar of the RBI’s operations in the secondary market, it provides greater clarity to market participants who are worried about the government’s massive borrowing programme. Bond yields have fallen post the announcement. But, even as the central bank continues to attach primacy to growth considerations, and rightly so, it must be mindful of the inflationary pressures in the economy. The rise in global commodity prices, coupled with the possibility of disruptions in supply chains, leading to a situation of inflation sustaining above the upper threshold of the inflation targeting framework alongside weak growth, could only complicate matters for the central bank. Balancing multiple objectives will be difficult. On the growth front, the central bank has retained its earlier projection of 10.5 per cent for the current financial year, which is far more conservative than the International Monetary Fund’s recent assessment, which pegs growth at 12.5 per cent. However, the risks to the economic recovery have increased considerably in recent weeks. The sharp surge in COVID-19 cases, and the imposition of localised restrictions, could adversely affect economic activity. Supply side disruptions, as well as subdued demand could delay the economy’s return to normalcy. The primary objective of policy should be to dramatically scale up the vaccination drive to cover a larger section of the population.