RBI steps into the ring, underwrites economic revival

Even before the pandemic forced a meltdown of the Indian economy—remember the 24% contraction of the national income in the fiscal first quarter—the Reserve Bank of India (RBI) has been playing a quiet, but supportive role to North Block.

Last Friday, RBI pulled out all stops as it were committing to boldly underwrite the economic recovery. Yes, it did not initiate another round of rate cuts, yet in both actions and words, the central bank made clear that it would—like its counterparts in (most central banks of) other countries—do whatever it takes to create an ecosystem to foster a revival.

For one, it has put out key guidance on the Indian economy by suggesting that the economic tide is turning. Assuming there is no second wave of covid-19 in the offing, RBI believes the economy will mend over the next two quarters, and actually return to black in the fourth quarter ending March 2021. Remarkably it has projected economic growth in the first quarter of 2021-22 at an astonishing 20.6% (this number exaggerates the recovery, given the base effect of the record contraction in the previous year).

Delivering his policy address, RBI governor Shaktikanta Das summed it up saying: “By all indications, the deep contractions of Q1 are behind us,” and then added: “In this environment, the focus must now shift from containment to revival.”

Second, it bets that the current wave of retail inflation is transitory. It also believes the spurt was triggered by the supply chain disruptions in the aftermath of the nationwide lockdown. And once the lockdown is gradually wound down—especially at the local level, where it continues to be deployed as the primary weapon to contain the spread of the pandemic—the supply bottlenecks would ease and so would inflation.

Third, probably the most important of the announcements, RBI has guaranteed the continuation of the present abundance in liquidity. Effectively, the central bank has capped bond yields on government securities, suggesting they (and related lending rates) will only head south.

“Market participants should be assured that in keeping with the monetary policy stance announced today, the RBI will maintain comfortable liquidity conditions,” the governor said. “Yields in the government securities market, both primary and secondary segments, also need to evolve in alignment with the comfortable liquidity conditions. This is important for those segments of the financial markets that rely on the g-sec yield curve as a benchmark for pricing financial instruments so as to benefit from the easy financing conditions engendered by the RBI’s policy measures and operations.”

The thing is that the RBI is not actually done yet. It has made it abundantly clear in its “accommodative stance” that another round of rate cuts early next year are very much on the table—presuming that its benign forecast on inflation holds up.

However, the big unknown in all this is the pandemic, which originated in Wuhan, China. Given the resilient nature of the virus, covid fatigue among the populace and the fact that the universal availability of the vaccine is unlikely to happen quickly, any predictions about the virus is on a wing and a prayer.

Recent data suggests that the curve measuring the spread of the virus is flattening in India. Whether the trend will hold up is in the realm of the unknown. Yet, what this trend can do is to instil confidence among the authorities to dial down the local lockdowns. Because without puncturing the fear economy, the contact economy, especially services such as aviation and hospitality, will continue to suffer.

While this may be the case, the fact is that RBI has gone out on a limb here. Now all eyes will be on North Block. Will it roll out the long-promised second economic stimulus?

Anil Padmanabhan is managing editor of Mint.

Comments are welcome at anil.p@livemint.com