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Considering the severity of India’s second covid-19 wave, the upcoming June monetary policy is likely to gain significant importance. To be sure, the Reserve Bank of India (RBI) had already taken a proactive step in announcing targeted liquidity and regulatory measures on 5 May to help different affected sectors. Since early 2019, it has been able to demonstrate its intention and ability to stay ahead of the curve, without which there would have surely been a greater growth sacrifice.
We do not expect any change in conventional rates or liquidity measures. Rates are already at a record low and there is no point in penalizing savers anymore, who are already earning negative real returns. Liquidity is significantly abundant, sufficient to support growth and stem any potential financial stability risks. The monetary policy committee (MPC) will ensure that the tone of the forward guidance is dovish, even while highlighting upside risks to inflation from potential supply disruptions and further strengthening of the global commodity cycle.
Supporting growth will continue to be the main priority at this stage, particularly as genuine demand-side inflationary pressure is expected to remain muted due to a weak labour market and persistent negative output gap. The policy statement of the MPC is likely to emphasize that while the central bank will continue to support growth, a faster path to recovery will be contingent on an expeditious vaccination drive and greater investment in India’s healthcare facilities by government authorities.
The RBI will likely announce one more Government Securities Acquisition Programme (G-SAP) of ₹40,000 crorefor the remainder of April-June 2021, along with G-SAP 2.0 for July-September of another ₹1 trillion.
The RBI will also consider announcing a few more regulatory measures, which may include: a) emergency credit line for microfinance institutions; b) partial credit guarantee scheme 3.0 for microfinance institutions; c) more liquidity support to Nabard, Sidbi and NHB; and d) greater targeted support for the real estate sector.
The RBI’s 5% average consumer price index (CPI) forecast for FY22 and 5.2% average for 1HFY22 looks credible and does not need any revisions at this point in time. With the growth rebound likely to be softer in FY22, we do not see a significant threat of genuine demand-side inflation pressure emerging anytime soon, as the output gap is likely to stay negative in FY22, limiting bargaining power related to wages at a minimum.
While the RBI may consider revising downwards its FY22 growth forecast of 10.5% year-on-year, we think it is best for the central bank to hold on to its forecast at this stage. It showed tremendous sagacity in providing a very conservative growth forecast in February, going against the tide of over-optimistic growth projections back then. Being able to hold on to the growth forecast provided in February will talk volumes about the central bank’s ability to stay ahead of the curve and not react in haste, particularly when the situation remains extremely fluid.
There is no doubt that localized lockdowns will impact India’s pace of economic recovery, but even then, it may be possible to achieve the RBI’s 10.5% y-o-y growth estimate for the following reasons. First, the base effect remains significantly supportive, as we are coming out of a record decline of 7.3% in FY21. Second, global growth recovery is expected to be stronger in 2021 (6%+ y-o-y) relative to what the RBI has factored in currently (5.5% y-o-y), which could add 20 basis points incrementally to India’s growth. Third, the nature of the current lockdowns in states is different from the hard nationwide lockdown announced last year; therefore, while mobility has fallen to last year’s May-June levels, economic activity has not been that severely affected. Fourth, if the mathematical model-driven predictions made by IIT scientists—daily covid-19 cases falling to 15,000 by June-end or early July—is proven to be true, sentiments about future growth prospects could turn swiftly. Fifth, given the volatility and the sizable revisions that are characteristic of India’s quarterly GDP data, it may make sense to wait at least for the April-June GDP data before making any changes to the full-year forecast.
Kaushik Das is India chief economist, Deutsche Bank AG.
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