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The Monetary Policy Committee (MPC) has voted for status quo in the policy rates, so as to boost growth, even as prices rise. The MPC’s rationale, rightly, is that the ‘substantial wedge’ between wholesale and retail inflation points to supply-side bottlenecks, calling for an accommodative policy stance to remove the constraints.
The targeted long-term repo operation will continue to be available on tap, covering yet more sectors. The counterpart rupees created by RBI mop-up of dollar inflows would not actively be sterilised, but be allowed to be parked by banks under reverse-repo operations.
A repo rate of 4% when inflation is expected to stay above 6% means that negative real interest rates by design. Let us hope animal spirits are perking up.
In tandem, it is most welcome that RBI is reviewing extant guidelines for a whole gamut of risk-mitigation products, to enable market players to better manage credit, interest-rate and currency risks, and also to policy-induce a liquid and vibrant corporate bond market.
A liquid market for credit default swaps would fast-forward an active market for corporate bonds, needed to shore up transparent project funding and modern arm’s-length finance. In parallel, RBI has announced a series of focused measures to extend long-term credit availability for stressed sectors, revamp regulatory oversight over non-banking financial companies (NBFCs) and path-breaking liquidity support for regional rural banks.
Further, RBI is to issue new ‘comprehensive’ norms to liberalise call, notice and term money markets, and that for commercial paper and certificate of deposit.
Addressing the structural and Covid management-related bottlenecks that push prices up even as the economy contracts is beyond the scope of the central bank, as are cascading and expanding fuel taxes that also contribute to rising prices.
What it can do is to stand ready to mop up excess liquidity at any sign of demand outstripping supply, while keeping steady the flow of financing to fuel growth as it gathers momentum.
This piece appeared as an editorial opinion in the print edition of The Economic Times.