The Reserve Bank of India (RBI) in its policy on Friday (December 4) kept the repo rate unchanged at 4 percent. The Monetary Policy Committee (MPC) also maintained an accommodative stance at least during current fiscal year and into the next year.

Reacting to the policy, Sajjid Chinoy of JPMorgan said that now the growth and inflation trends are very clear. “For the last 6 months we had elevated inflation but growth was decelerating. Now the RBI has got more confidence that growth is inflected. This was a substantial upgrade to its growth forecast; they forecast positive growth in the second half of the year. So, there is more confidence here that the economy is on a relatively strong recovery path,” he said in an interview to CNBC-TV18.

Chinoy said that going forward the key thing to watch out for is the core inflation. “Going forward the key thing to watch on inflation in the next 6 months is not so much headline, but it is core inflation. Because in an unprecedented shock like this, when both demand and supply have been simultaneously affected, we don’t know how much of the impact is cyclical versus structural. My sense is over the next 6 months, if core inflation momentum begins to come down, even if the headline takes longer to soften, the RBI will heave a sigh of relief. If the core inflation continues to surprise on the upside and we get closer to the borrowing program, then I think central bank and MPC will have to get progressively cautious,” he said.

Indranil Pan, Chief Economist at IDFC First Bank said, “Today it is not only about the rate setting structure of the monetary policy – one of the most important roles possibly that the monetary policy has and the MPC has. The monetary policy statement therefore needs to be looked into in conjunction with a lot of other factors that are being highlighted in terms of the credit easing, the quantitative easing that not only the RBI is doing, but also the global central banks are engaged with. So, I think the whole understanding of the monetary policy therefore needs to be taken away from only the rate setting exercise into all these other issues which obviously are growth enhancing, support to the fiscal strategy and the Atmanirbhar strategy that the government has laid out.”

Renu Kohli, an independent economist said she is not surprised at the monetary review, but is concerned about the credit demand. “I am not surprised at the monetary review because it was very much expected from the October review, the commitment they had given about continuing the accommodative stance into the next financial year. But I would worry about the credit demand. That is where the monetary impact needs to show itself,” she said.

“We haven’t seen any kind of response so far. The economy and particularly the supply side is still recovering from the lockdowns and the unlocking is still taking place, it is understandable the last 6 months, but my worry is actually the exceptional easing measures starting with interest rate cuts and the TLTROs pre-date the pandemic and from early 2019 and December 2019 in particular. A lot of OMOs, everything has happened and yet there has been no response from the credit demand side. In fact we ended March 2019-2020 year with credit growth decelerating to half of that over the previous year; it was something like 6.7 percent. That is where the real concern lies,” she explained.

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(Edited by : Abhishek Jha)