Staying the Course

With continuing uncertainty over the economic outlook, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in line with expectations, chose to leave the benchmark policy repo rate unchanged in its June meeting. The committee members also voted unanimously to continue with the accommodative stance as long as is necessary to revive growth — reaffirming, rightly so, the primacy to growth considerations at this critical juncture, despite a build-up in inflationary pressures. Alongside, RBI governor Shaktikanta Das announced a slew of measures to ease financing conditions in the economy. The second tranche of the government-security acquisition programme (GSAP) which will conduct secondary market purchase operations to the tune of Rs 1.2 lakh crore, up 20 per cent over the first instalment, is aimed at providing continued support to the government’s borrowing. Including state borrowings (state development loans) under this programme is also likely to moderate the spread between the G-Sec and SDLs. Further, for the more contact-intensive segments of the economy, which have borne a disproportionate burden of the lockdowns, a separate liquidity window has been announced to ease the financing conditions.

In light of the second wave of the pandemic disrupting the momentum in economic activities, the RBI has lowered its growth forecast for this year. The central bank now expects the economy to grow at 9.5 per cent, down from its earlier assessment of 10.5 per cent. Growth expectations have been significantly slashed for the first half of the year — 18.5 per cent in the April-June quarter (down from 26.2 per cent earlier) and 7.9 per cent in the July-September quarter (from 8.3 per cent before) — underlining the distress in the economy. Forecasts for the second half of the year, though, have been raised, presumably on account of domestic demand reverting to some degree of normalcy as the vaccination drive gathers momentum. On inflation, even though the RBI expects a marginal hardening of prices in the second half compared to its earlier assessment, it is expected to remain within the upper threshold of the inflation targeting framework. However, the MPC members must remain cognisant of the risks on this score. Appeals for coordinated action by Central and state governments to cut fuel taxes in order to contain input cost pressures are unlikely to have the desired effect considering their already stretched finances. A pick-up in global commodity prices, coupled with producers passing on higher input prices to consumers as demand firms up, could push retail inflation beyond the tolerance threshold.

The increased uncertainty over the country’s growth prospects suggests that the central bank may perhaps have to continue with accommodative conditions longer than was previously envisaged. The RBI governor also quashed talk of any withdrawal of measures arguing that it was premature to talk about policy normalisation. The policy stance will depend on the infection curve, the vaccination drive, and how economic activities shape up once the lockdown restrictions are rolled back.