RBI still cautious on durability of growth  

The RBI kept benchmark policy rates unchanged, but emerged as a generous patron. Notwithstanding the unhelpful baggage of rising retail inflation, it committed to yield a yard and remain accommodative of both rate cuts and liquidity support. The extended pause amid price rise implies that further rate cuts are unlikely this fiscal, but so are rate hikes and that’s some comfort.

Importantly, the dovish tone assuaged markets regarding an early withdrawal of expansionary monetary policy launched in response to Covid-19. Curiously, the measures that once stabilised markets could turn troublesome later as the interbank liquidity surplus appears unstoppable and now at Rs 7.8 lakh crore.

It’s this overhang of the RBI’s outright bond purchases and unsterilised forex market interventions that could limit the central bank’s scope to support markets amid high inflation. So Governor Shaktikanta Das’s SoS to the government is to rein in inflation. 

As for growth, the RBI believes India exited the technical recession, which it slipped into on account of Q2 contraction. If in October Das assured us the worst was over, latest data suggests the economy is shrugging off the deathly grip of the virus and could enter the positive realm this quarter itself. But the RBI ignoring the changing liquidity glut could also mean that it’s still cautious about the durability of growth, which is surrounded by uncertainties.

Das is willing to tolerate high inflation as long as growth impulses become firmly entrenched and perhaps expects liquidity smoothening in Q4 when government finances hopefully get better. Considering the Centre’s borrowing programme of Rs 8 lakh crore by next March, the RBI may have to pitch in Rs 3.5-4 lakh crore to address the potential demand-supply imbalance.

This, in addition to the existing liquidity surplus, could push liquidity even higher. Measures to absorb or drain it is too early, yet some expect the RBI to act, citing inflation. Analysts also suggest unconventional tools such as long-term reverse repo operations, a special window for states to manage fiscal deficits, operation twist and others instead of ignoring the liquidity glut altogether.