The Reserve Bank of India (RBI) on Friday stayed broadly on expected course as it continued its focus on supporting growth through an easy-money policy with an inflation tracker, but some measures to sponge up additional liquidity. gave himself space to grow. The Monetary Policy Committee (MPC) unanimously decided to keep the repo rate, or the rate at which it lends short-term money to banks, unchanged at 4%, and the reverse repo rate, or the interest rate that banks have to park their surplus. Pays for Funds with it, at 3.35%. Furthermore, its “accommodative” policy stance remains in place, with a 5:1 vote in favor by MPC members.
With India’s economic growth showing signs of picking up, the RBI clearly does not want to take any action that could get in the way of the 2021-22 recovery from our Covid contraction last year. Goods and goods movement, GST collection, power generation, cement production and a manufacturing bump all pointed to a revival of commercial activity, as Covid infections remain low and vaccination coverage expands. However uncertainty still remains. RBI retained its GDP forecast for 2021-22 at 9.5%. While it lowered its inflation forecast from 5.7% to 5.3% this fiscal, rising energy and commodity prices globally could still put upward pressure on general prices.
Despite the RBI’s liberal money supply for lending purposes, credit demand has not been strong, weak consumption has held back private investment, and asset-price inflation has been a cause for some concern. With liquidity in such a dramatic surplus for so long, the creation of obvious and hidden risks was inevitable. To limit these, the central bank should generalize its policy support. RBI’s moves to do so include the suspension of large bond purchases under its government securities acquisition programme, which can be turned into an ‘Operation Twist’ device only for yield-curve management, and the use of its variable rate reverse repo. Potential move (VRRR) auction, which is a way to absorb idle cash from banks at rates generally higher than its reverse repo rate. RBI has prepared a calendar for the auction of VRRR bonds and the liquidity through these is significant. Still, its reluctance to raise the reverse repo rate says something about how the RBI is proceeding. According to Governor Shaktikanta Das, the reversal of its support measures should be gradual, calibrated and non-disruptive. truth. But as an institution, it must look at what lies on the distant horizon, not just the near-term impact of its policy. Extended phases of exceptionally cheap money can have consequences that are not immediately apparent. Unless our recovery is more fragile than expected, the RBI should consider a swift move towards monetary normalcy. Lending money at rates below inflation, even if given only to lenders, is not common. This is equivalent to paying borrowers to borrow.
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