Home / Opinion / Columns /  Wait and watch remains the mantra for RBI

The Reserve Bank of India’s (RBI’s) monetary policy statement is a concise expression of three factors: rise in commodity prices, possible supply-side disruption due to the spread of the new coronavirus variant and moderation in global growth and international trade. This has reinforced inflationary pressures. Headline inflation in advanced economies and emerging market economies has soared, prompting several central banks to continue tightening and others to bring forward policy normalization. A possible faster normalization by the Federal Reserve is also within the realm of possibility.

Against this background, on the domestic front, the latest data showed that growth appears to be broad-based across sectors, including contact-intensive sectors. Continued direct transfers under the PM Kisan scheme are supporting rural demand. The demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has moderated in November from a year ago, suggesting a pickup in farm labour demand. As far as inflation is concerned, RBI projects CPI (consumer price index) inflation at 5.3% for FY22 with risks broadly balanced.

gradual calibration

Thus, the assessment at this juncture supports a status quo in the rate of interest, but a gradual calibration of liquidity. Commentaries are suggesting that the central bank has already acted stealthily on rates and hence an increase in reverse repo would have been a non-event in the latest monetary policy committee (MPC) meeting (ideally the RBI Act does not allow that). Such a perception is clearly misleading.

It may be noted that overnight rates still hover around the lower end of the corridor with Treps(Tri-party repo dealing system) averaging around 3.30%. Overnight rates will start rising towards the upper end of the corridor when the total amount parked in overnight reverse repo dips below 1 trillion, likely to begin from January onwards. This will complete the corridor normalization process and a hike in reverse repo rate beyond such a timeline could be the ideal opportunity and better timed.

Meanwhile, the recent increase (of 3.3 trillion during the fortnight ended 5 November) and a swift slump of deposits in the subsequent fortnight (of 2.7 trillion) clearly points out that liquidity management cannot be divorced from market microstructure.

focus on payments

The payment system has attracted RBI focus in every recent monetary policy. Keeping the momentum going, RBI has again announced measures to facilitate adoption of digital payment methods.

The payment of user charges for digital payments has been a long-pending issue with banks absorbing the merchant discount in many cases. RBI initiating a discussion paper to take a comprehensive view of the issues involved that cover all aspects related to charges involved in various channels of digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets), UPI, etc. is a welcome move.

Financial inclusion

The central bank’s proposal to deepen financial penetration, by bringing 550 million feature-phone users into the mainstream digital payments, is a welcome move. In a similar vein, the proposal to enable small-value transactions through an ‘on-device’ wallet in the UPI (unified payments interface) app, which will conserve banks’ system resources without any change in the transaction experience for the user, will encourage further use of digital payments.

Further widening the ambit of UPI to access investment in the G-secs (government securities) segment through the recent launch of the retail direct scheme and IPOs will increase retail participation in financial markets.

The decision of capital augmentation and repatriation without prior RBI approval for Indian banks would ensure faster turnaround time to participate in the host country financial ecosystem seamlessly. Also, timely repatriation of additional profits can augment the domestic operations in select cases.

Overall, the policy continues to be in wait-and-watch mode. Reliable covid forecasting models now project a mild rise in infections in Q4. If this materializes, the policy accommodation by RBI will possibly continue in the February policy as well.

Soumya Kanti Ghosh is group chief economic adviser, State Bank of India. The views expressed here are personal.

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