The Reserve Bank of India (RBI) has reviewed its monetary policy lately.
What does the review indicate?
This review indicates that the RBI will prioritise the revival of economic growth over inflation through the end of the current financial year.
The RBI has reconstituted the Monetary Policy Committee (MPC), with three new external members.
The MPC unanimously voted to keep policy interest rates unchanged.
This was said even as it categorically stated that the RBI would continue with the accommodative stance to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy.
What did the RBI find?
The MPC tilted away from its inflation targeting mandate by downplaying the risks on the price pressures front.
This is because the RBI has found that supply shocks were responsible for keeping inflation above the tolerance band for months.
These shocks should dissipate as the economy unlocks, supply chains are restored, and activity normalises.
As part of the shift in priority, it projected that it would stick with the accommodative stance during the current and the next financial year.
This forward looking guidance prompted one of the new members to dissent and vote against the wording.
The MPC’s majority view of ensuring a ‘dovish’ position on interest rates for at least six months has left it little near-term leeway to tame price pressures.
What did the RBI Governor emphasise on?
The RBI Governor emphasised that the current ‘inflation hump’ was a brief phenomenon that needs to be looked through when taking measures to help the economy return to its feet.
The RBI has taken a series of liquidity enhancing and credit flow supportive steps.
With these steps, the RBI reiterated its commitment to maintain stability in the financial markets.
This comes at a time when the resources-strapped Central and State governments are expected to resort to substantially higher levels of borrowing to meet their spending needs.
There can be no argument that the economy needs all the support it can get to recover from its 23.9% estimated contraction of the first quarter.
What is the forecast?
The RBI sees a gradual recovery.
It has forecasted a marginal growth of 0.5% in the fourth quarter that would narrow the full-year contraction to 9.5%.
It is the inflation assumptions, however, that cause disquiet.
From a projection of 6.8% for Q2, CPI inflation is posited to sharply ease: 5.4% in Q3 and 4.5% in Q4.
There are risks like persistence of supply bottlenecks, cost-push pressures from higher taxes on transport fuels and the possibility of food-price inflation.
In overlooking these risks that becoming entrenched pose to the outlook on prices, the RBI has clearly sought to talk up confidence.
