RBI stays the expected course but inflation risks are rising
- It's still in growth-supportive mode, though it has revised its inflation forecast upward to almost touch its upper-bound of 6%. Will rising prices prove transitory? If not, we'd have squandered gains made by an inflation-targeting regime
The Reserve Bank of India’s (RBI) monetary policy on Friday stuck to its expected course, maintaining its focus on supporting a nascent growth recovery, even as inflationary risks cloud the path ahead for our economy. The monetary policy committee decided unanimously to leave the repo rate, or the rate at which the central bank lends short-term funds to banks, unchanged at 4%, and the reverse repo rate, or the rate at which it absorbs excess liquidity from them, at 3.35%. RBI also extended a liquidity facility by three months to route funds to struggling sectors. Its version of a 'whatever-it-takes' approach to ensure a durable economic recovery takes shape isn’t surprising. Though recent economic indicators have shown signs of improvement, growth impulses remain weak and require continued policy support. Risks of a third covid wave and uncertainty over the Delta variant also loom large. Until there is clarity on how and when our economy can put the pandemic effects behind it, it is prudent of RBI to stay on guard.
On inflation, RBI has raised its forecast for 2021-22 to 5.7% from 5.1% earlier, aligning its projection with the reality of escalating prices, with our retail-index inflation having stayed above RBI's 6% upper bound for two months in a row. The central bank, however, has held on to its position that this is a transient rise, caused by shocks that should ease and allow prices to moderate by the third quarter of this fiscal year. Perhaps a restoration of business normalcy will indeed ease price pressures, and the recent surge in global commodity prices seems to be tapering off, but it is not entirely clear if price relief can be counted upon. Should the wager go bad, we may have lost some of the good work done by an inflation-targeting regime in anchoring inflationary expectations in India. The stability of our rupee's real value, after all, is actually the central bank's main job. It only has a supporting role in economic growth, whose responsiveness to easy-money stimulushas been observed to be weak on account of factors beyond its control.
Interestingly, while RBI extended its on-tap targeted long-term repo operations by three months until the end of 2021 to extend credit to ailing sectors, it also announced variable reverse repo rate auctions to absorb excess liquidity from the banking system. Governor Shaktikanta Das, however, was careful to emphasize that this did not imply a shift away from its accommodative stance. Growth may be the focus of RBI’s policy for now, but it is inflation that it must watch out for.
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First Published:6 Aug 2021, 12:14 PM IST
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