The Reserve Bank of India’s Monetary Policy Committee (MPC) has decided to leave key interest rates untouched and continue with its accommodative stance for the present, in order to sustain growth, which is now showing signs of picking up strength and momentum. The MPC continues to be optimistic on the growth front, pegging it at 9.5 per cent in the ongoing fiscal. While that expectation is supported by most early indicators, its genuineness on the inflation perhaps is not. The MPC expects an average inflation print of 5.3 per cent, well within the RBI’s tolerance range. However, there are several imponderables which the committee appears to have not adequately factored in for the moment.
The new Omicron variant, which has already led to border closures and restrictions on international flights, could have an impact on both growth and prices.The ongoing supply chain bottlenecks, particularly out of China, as well as the ongoing shortage of electronic chips and semiconductors, can impact the revival that many sectors of industry are currently experiencing. Consumer inflation is also uncomfortably high, with unseasonal late rains and climate events leading to a sharp spike in vegetable prices, even as energy prices continue at record levels.The committee’s view that this is a transient situation and there will be price corrections due to a good monsoon as well as supply side interventions, may be optimistic.
On liquidity management, the RBI has leaned heavily on mopping up excess liquidity through the variable repo rate auctions, leaving policy rates untouched. However, as Central banks around the world continue to ease back on the liquidity throttle, the RBI may have to resort to a rate hike sooner than later. The downside of delaying the policy normalisation, of course, is that when it does happen, the correction has to be steep. Although transmission from policy interest rate signals to the retail consumer level has been quite sluggish in the past, a sharp tightening could have a disproportionately larger impact on retail borrowers who have been bailing out the banking sector on the credit growth front after the easing of lockdown restrictions. With a future Covid ‘wave’ not ruled out, the timing could prove awkward for lay consumers.
