With major central banks around the world ready to call off the pandemic-induced monetary expansion, the Reserve Bank of India (RBI) will now find it more risky to lag behind, lest money fleeing our shores for other markets leaves us unsteady. bother with But this thing is not going on in the mind of RBI right now. On Wednesday, it not only left its repo rate unchanged at 4%, it also kept its announced reverse repo rate steady at 3.35%. As Omicron has clouded the horizon, with no indication of when it might go down a policy-reversing path, credit has sharply decreased since early 2020 as an economic cushion for the Covid shock . This seems strange, given how inflation has risen above projections globally, forcing the US Fed, no less, to back its “transient” talk and rethink macro risks as the US The economy improves. India’s recovery is relatively fragile, but our sharp growth spurt after last year’s setback will force the RBI to increase its price-level monitoring, even if inflation has remained within its target range recently. Our central bank expects it to peak in the last quarter of this fiscal and “5.3% for 2021- 22”. Like production growth, pegged at 9.5%, this was an estimate that was not revised. Its inflation forecast for the first half of 2022-23 is 5%. The risk of an unexpected price flare-up at some point, however, requires more attention.
While global commodity prices, particularly oil, have cooled recently, volatility is unlikely to ease and the effects of the second round of fuel upshoots from earlier are visible with their usual lag. Omicron-tightened wallets and recent fuel price cuts may ease some of the pressure, as the RBI feels, but could be offset by larger global factors, driven by the Covid-compressed consumer demand growth. Along with that there is enough money to go around. Whether viewed in terms of capital inflows or the RBI’s domestic commitment to price stability, it risks slipping behind the curve of policy normalization, which will make it difficult to catch up with later, when key variables suddenly go awry. Huh. A switch in stance from “adjustment” to “neutral” will be needed soon, and while Omicron may have kept its hand, we await clarity on which path it plans to take now. .
To be fair, it’s not like the RBI has overlooked the extra money in our financial system. To boost liquidity, it has conducted a 14-day Variable Reverse Repo Rate (VRRR) auction, with an average rate of around 3.95%, which is just a short distance from its repo rate (the rate at which it infuses funds). And is far above official. Reverse repo rate. that the RBI intends to conduct 6.5 trillion worth of VRRR sales in the middle of the month and then Rs 7.5 trillion on New Year’s Eve reflect some urgency on short-term monetary conditions. Note that VRRR operations impact the short-term end of our bond market’s yield curve and are serving as its key tool for liquidity management as the revival of our economy gathers momentum. Withdrawals from the system at a rate of around 4% mean a narrowing of its liquidity corridor. This squeeze is in line with the tightening of the amount that banks can borrow under their marginal standing facility from the earlier 3% of their net demand and time liabilities to 2%, although this window has not seen many borrowers as banks. Has mostly surplus money. While the RBI’s VRRR approach to suppress inflation is ludicrous, if its maths turns out to be wrong, at least it has begun to clear itself a path for a return to policy normalcy.
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