RBI may need a more hawkish eye on inflation2 min read 04 Dec 2020, 10:51 AM IST
It held its policy at 4% rate, as expected, and enhanced special credit coverage for stressed sectors, but its dilemma over excess liquidity looks far from resolved
It’s a tight spot the Reserve Bank of India (RBI) is in. Even though our economy slumped into a recession in the first half of 2020-21, there seems little further it can do with monetary policy to spur growth. On Friday, Governor Shaktikanta Das declared that RBI expects national output to contract by 7.5% this fiscal year, revising its outlook for the better. Expansion, in its assessment, is already underway this quarter. Its monetary decision to leave its main policy rate unchanged at 4%, the rate at which it lends money to banks, thus seems appropriate. This is because retail inflation has hovered above its 6% upper tolerance limit for much of this year, the first time its 2016-adopted price-stability framework looks poised for failure. Of course, our covid circumstances constrained it to err on the side of a growth revival. By its latest forecast, RBI expects inflation to drop from 6.8% in the current quarter to 5.8% in the next, and then stay under control. Meanwhile, it has announced wider coverage of an earlier scheme by which banks buy bonds issued by firms in specific stressed sectors--a way to ease credit.