Housing Limits: On RBI’s Monetary Policy

RBI’s latest Monetary Policy Statement and its related actions reflect the dilemma faced by the monetary authorities. While RBI’s Monetary Policy Committee voted unanimously to keep the benchmark interest rates unchanged As part of its efforts to support growth as the economy improves, one in six members of the MPC again protested and voted against continuing with a liberal stance for ‘as long as necessary’. did. Pro. Jayant Verma had flagged the risks of a prolonged monetary adjustment to the inflation outlook by ‘stimulating asset price inflation’ in the last meeting in August, while he said that its impact in ‘mitigating the crisis in the economy’ is certainly was far more. Marginal MPC’s own current inflation outlook is a mixed bag. Average inflation forecast for the full financial year has been cut by 40 basis points to 5.3%, while the committee stresses that core inflation ‘remains high’, with the Center and states shifting to the supply side and cost Further improvement will be required. Pressure, including a calibrated cut in indirect taxes on petrol and diesel, to address the issue of ‘excessive’ pump prices. In acknowledgment of difficulty in containing price pressures despite keeping interest rates at pro-growth lows, the Monetary Panel reiterated its plea for fiscal authorities to step in and help control inflationary pressures, particularly Significantly higher levels of pass-through impact transportation costs.

Governor Shaktikanta Das tacitly acknowledged that the time has come to end the pandemic-era liquidity support as he announced the suspension of the G-SAP bond purchase program as well as flushing out surplus liquidity from the banking system. outlined the measures. He cited “strong” growth impulses to justify the RBI’s decision. Here again, the MPC’s forecast on growth is fraught with uncertainties and caveats. Contact-intensive services, which contribute about two-fifths to economic output and were worst hit by COVID restrictions, are still far behind their pre-pandemic levels; The manufacturing sector is still nowhere close to supporting a rebound in investment demand; And, most importantly, the external environment that has so far been a major tailwind – through capital flows and demand for the country’s goods and services – is becoming more uncertain. With growing signs that some major advanced economies are gearing up for an imminent normalization of monetary policy, the elbow room for the RBI to remain lenient is fast reducing. As Prof. As Verma noted in his dissent, monetary authorities face the threat of failing to meet inflation expectations by firmly placing the MPC’s primary mandate around the 4% target. A failure that will hurt the savers the most and risks derailing the consumption-based revival.