The communication from the Reserve Bank of India (RBI) following today’s monetary policy committee (MPC) meeting was emphatic in reiterating their commitment to support growth recovery. Keeping the repo rate unchanged today was no surprise. The status quo on the reverse repo rate was also in line with our expectation, even though we felt that it was a close call, and the move surprised a sizeable number of market participants. While uncertainty about the inflation trajectory in the coming months cannot be ignored, the central bank seems clearly in favour of following a “calibrated and well-telegraphed” path to normalisation of monetary policy and withdrawing crisis-time liquidity support, even if that means erring on the side of caution.

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While there may have been some expectation of the RBI moving faster as regards monetary policy normalisation in line with what several other central banks around the world are planning, the Indian central bank appears to be clear on staying more calibrated. Indeed, as regards achieving the fine balance between growth and inflation that central banks target via monetary policy, the prevailing circumstances in a country like the US are markedly different than those in India.

For instance, the prevailing rate of inflation in the US, as on December 2021 touched a high of 7 percent, which is far higher than their targeted inflation rate of 2 percent. Such a situation necessitates the US Federal Reserve to take urgent and appropriate action in terms of hardening interest rates to cool inflation. On the other hand, the CPI print in India has hovered around 5 percent for the preceding few quarters, which is well within RBI’s tolerance band of 4-6 percent. While the RBI would surely want CPI inflation to come down to a targeted level of 4 percent, the situation certainly isn’t as dire as it is in the US.

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Furthermore, India needs to rapidly accelerate the revival in economic growth seen in the last couple of quarters, which is still in a nascent stage. Even though an expected 9.2 percent GDP growth in FY22 would mean a strong uptick optically, India is virtually in the middle of a phase of zero-growth over a two-year period. Also, the RBI was more proactive in providing large quantum of liquidity to support the economy during 2020 and 2021 rather than cutting rates aggressively. Thus, it is not surprising that the central bank is now prioritising unwinding of surplus liquidity over rate action.

While business and consumer confidence have started inching upwards from the pandemic time lows, the situation gets complicated when one considers supply-side disruptions and volatility in prices of industrial raw materials and energy costs globally. Amidst all this, the RBI will also have to manage the government’s growth supportive initiatives and a sizeable borrowing programme while keeping bond yields relatively stable. In fact, at the current state of only a nascent and uneven recovery in growth, it is not surprising that the central bank stays mindful of avoiding possibilities of a disruptive uptick in the interest rate spectrum.

Today’s MPC announcement of status quo on the reverse repo rate, communication as regards overall supply of fixed income security (like replacement of Rs 65,000 crore of NHAI bonds with Government of India securities), headroom for alteration of deficit financing mix (keeping in mind the realistic possibility of higher small savings collection as opposed to the budgeted number), hike in VRR investment limit for foreign portfolio investors, and emphasis on efforts to conduct a non-disruptive government borrowing programme will likely provide a cushion to yields in the near term. Accordingly, a non-parallel downward shift in the yield curve was witnessed today. One feels that, in the absence of any unforeseen negative surprise in the coming weeks, Indian bond yields may stay closer to the pre-budget levels, reversing the knee-jerk uptick witnessed after the Union Budget.

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The RBI’s decisions to extend term liquidity facility of Rs 50,000 crore to emergency health services and on-tap liquidity window for contact-intensive sectors is a welcome step as it may help a number of small and mid-size entrepreneurs with additional funds from banks and financial institutions. Separately, today’s decisions to increase the cap on amount for e-RUPI vouchers and allowing for multiple use of the same were noteworthy, while the guidelines on information technology governance, risk, controls and assurance practices will be announced separately.

Overall, while the central bank continues to move ahead in line with the Union Budget announcement of introduction of a digital currency, as expected, the monetary authority stays cognizant about the various potential risks, the criticality of financial literacy and customer awareness in this regard, and looks set to remain cautious in their approach.

—Siddhartha Sanyal is Chief Economist & Head of Research in Bandhan Bank. The views expressed are personal. The author would like to thank Piyali Bhattacharjee for her assistance

Read his other columns here

(Edited by : Ajay Vaishnav)

First Published:Feb 10, 2022 7:01 PM IST