RBI does not falter with its economic vaccine


By DM Deshpande

The RBI, as can be expected, gave a right dosage through its monetary policy announcements. After showing promise, the economy is once again going through uncertain times. Growth has faltered a wee bit, but more worrying is the future course of the pandemic.

More than the spread of the virus, greater worry is the states’ response to it. Already some of the key states have declared local lockdowns and night curfews. The worsening pandemic situation in the most industrially advanced state of Maharashtra is a huge cause for worry and the continued situation there will surely hit the nation’s economy. There are reports of migrant workers leaving the state. Hopefully it is still a trickle and
soon be reversed.

The task of the RBI has been rendered even more difficult due to external factors. Spiraling commodity and oil prices have led to cost push inflation. Quantitative easing by developed countries is more a challenge than an opportunity.

Rising stock market prices and assets prices are a possible indicator that a bubble is getting built over a fairly long period of time. The fundamentals of the economy remain weak. Growth and recovery are being hampered by resurgence of COVID- 19 positive numbers. The daily second wave numbers in the country has already crossed the one lakh mark, a record that was not seen in the first wave last year.

Against this background, the Monetary Policy Committee (MPC) has left the key rates, repo and reverse repo rates unchanged. Besides the key decision of the MPC market invariably looks at the stance of the RBI.

One may call this communication aspect of the policy formulation and announcement. The reiteration of the accommodative stance is what the players were looking for and they got it in full measure.

Basically accommodative stance means keeping interest rates low and ensuring that there is adequate liquidity in the system. The MPC also deserves praise for stating in clear terms that the accommodative approach is for as long as it takes for the economy to charter durable growth. Risks of recovery falling back are high in these uncertain times. Hence, by not specifying any time frame such as two or three quarters, the MPC has clearly backed growth factors even if that meant easing a wee bit on the inflationary risks in the economy. 

In another piece of clear and forthright communication the RBI Governor has stated that it will do all it can to preserve financial stability in markets and insulate the domestic markets from spillover effects of volatility.

In these uncertain times, volatility in international markets-bond, equity and the like-may impact India. Essentially, this is an assurance from the premiere bank that there is no cause for worry and that there will be a helping hand if required.  With foreign exchange reserves topping $600 billion, the RBI can take this stance with confidence.

Beyond the key rates, the MPC does well on several counts-to shore up liquidity, to arrest rising bond yields and give a boost to credit off take. Low interest rates encourage borrowing across the spectrum. What is noteworthy is that there are specific sector initiatives for credit off take in warehousing of agricultural produce, for example. This will take care of the supply side constraints leading to higher levels of inflation in food mainly and agricultural prices, generally. 

Governments both states and the central have run huge deficits to combat the pandemic and mitigate the sufferings of the poor to the extent it was possible. They have issued bonds which banks per se have lapped up to meet their statutory obligations. The union government has a huge borrowing program. If the interest rates go up, it will derail the government’s plans.

The RBI, therefore, has been carrying out open market operations through which it is buying bonds from the banks. Now, in this policy the apex bank has launched a government securities acquisition program called G-SAP. Under it, the RBI has committed to purchase Rs one lakh crore worth government bonds in the first quarter of 2021-22. 

This is a huge sum and substantially higher than the previous years. It benefits not just the government but the other borrowers too, by keeping the interest rates in check. Interest rates on government securities is like a fulcrum that impacts
all other rates.

The RBI is not even considering the neutral interest rates stance. Accommodative stance means, it will strive to keep the interest rates low. Home loan borrowers can be rest assured that their monthly EMI’s will not rise in the immediate future or till the RBI revises it’s stance.

Business units too will feel relieved as an assurance like this one is so crucial in Covid times. Fortunately, the global oil prices are softening; one hopes that the trend would continue. If the coming monsoon season brings adequate rainfall, fears on the inflationary front will recede significantly.

Otherwise, the RBI will be forced to change its monetary stance to target inflation. Right now, it is policy induced recovery and growth for the economy. And the right type of action and support to mitigate the sufferings of the people due to
the pandemic.

The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh.