On the growth front, the MPC believes that economic activities are gaining traction, noting that “recovery in domestic economic activity is turning increasingly broad-based”.
On the growth front, the MPC believes that economic activities are gaining traction.
In line with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted to maintain the status quo in its December meeting. The committee kept the benchmark policy repo rate unchanged at 4 per cent, and decided to maintain its accommodative stance “as long as necessary” to revive growth. The tone of the statement was cautious, and more dovish than expected, presumably due to the uncertainty stemming from the new Covid variant. But, the central message of the statement stays the same — as inflation remains under control, considering “the slack in the economy”, that parts of the economy, especially private consumption, are below their pre-pandemic level, “continued policy support is warranted”.
On the growth front, the MPC believes that economic activities are gaining traction, noting that “recovery in domestic economic activity is turning increasingly broad-based”. The central bank has maintained its forecast for growth this year at 9.5 per cent. However, as growth in the second quarter was marginally higher than its earlier assessment, perhaps due to pent-up demand, it has lowered its forecast for growth in the second half. For the third and fourth quarter the forecast has been pared down to 6.6 per cent and 6 per cent respectively, down from its earlier assessment of 6.8 per cent and 6.1 per cent. However, even as the central bank has projected healthy growth in the first half of the next financial year, concerns over domestic demand and private investments remain. As some economists have pointed out, the Governor’s comments on “managing a durable, strong and inclusive recovery” reveal continuing concerns over the uneven nature of the economic recovery. On inflation, the committee has retained its full year forecast of 5.3 per cent in 2021-22 (with some changes to the third and fourth quarter estimates). While the persistence of elevated core inflation has been a source of concern, the committee will seek comfort from the sharp reduction in the excise duty and VAT on petrol and diesel which have eased retail prices. This, as the MPC noted, will also “have second round effects over a period of time”.
The next steps in the policy pivot, in addition to the normalisation of liquidity, involve raising the reserve repo, changing the accommodative stance, and thereafter, hiking the repo rate. But the timelines for these steps are now mired in uncertainty, influenced by the Omicron variant and the evolving growth-inflation dynamics. Considering that the economic recovery remains uneven, the MPC should remain cautious, remain data dependent, and calibrate its next steps carefully.
This editorial first appeared in the print edition on December 9, 2021 under the title ‘Cautious status quo’.