Various commentaries will be written about the Reserve Bank of India’s (RBI’s) repo rate, liquidity framework and assessment of growth impulses in the economy, but what its policy statement of Thursday actually reveals is a monetary authority marching in lockstep with the government’s fiscal policy. While it is always desirable for both to coordinate their actions, especially during exceptional economic crises, this harmonized progression breaks with past tradition and the widely-held idea of a modern central bank operating in a complex, globalized world. But through a slightly more granular lens, two broad strands emerge from RBI’s last statement for 2019-20.
The first is the central bank’s policy stance in the aftermath of the Union budget’s provisions for 2020-21. Popular opinion and wisdom now place greater responsibility on RBI for stimulating growth impulses than is probably feasible without medium-term repercussions on inflation and interest rates. Seen against the backdrop of an almost static budget, in which the financing of incremental expenditure seems largely predicated on lumpy disinvestment receipts and telecom spectrum sales, RBI has taken on greater responsibility than should be expected during an economic crunch. Some of RBI’s economic revival measures rekindle memories of a central bank from an earlier era, when its mandate required it to foster credit growth for greater economic activity. Over the past few years, the charter had dialled down direct credit intervention while focussing on a “modern monetary policy framework" that gave primacy to price and financial stability. Its policy signals were delivered mainly through open market operations and money market interventions. The current approach reverses that somewhat. Banks are being offered direct incentives to disburse incremental retail credit for the acquisition of automobiles and houses, and extend business loans to small businesses. RBI has even walked the extra mile. It is offering banks one-year and three-year funds at the prevailing repo rate in the face of rising inflationary pressures. These are extraordinary measures for extraordinary times, and could spur credit, but observers may be pardoned for wondering if the idea is to exorcize the influence of past governors on the RBI playbook.
Yet, RBI’s monetary policy statement is underscored by a sense of uncertainty. Its feeble attempts at optimism are shot through with data ambiguity on inflation and growth. Though the central bank is persisting with the government’s assumption of 10% nominal growth in gross domestic product (GDP) during 2020-21, it is also baking in elevated headline inflation levels over the next eight months. “Overall," the statement admits, “the inflation outlook remains highly uncertain." It combines this with scepticism over the sustainability of an economic uptick expected on account of the recent momentum displayed by some high-frequency indicators. The dynamics of this growth-inflation scenario, in which economic activity stays subdued while the price-line adopts an upward gradient, might have influenced RBI’s decision to hold its policy rate steady, but points to another crying necessity. The central bank must improve its forecasting techniques. It was too late in downgrading its GDP estimates for 2019-20 and that might have delayed its rearguard action. This time, too, it may need to accept the Centre’s assumption of 10% nominal growth with a pinch of salt.