From Siddhartha Sanyal
The status quo of key interest rates, with a unanimous vote and a sustained “loose” monetary policy stance, met expectations. While the split vote on monetary stance came as a modest surprise, given the incipient and uneven recovery, the RBI remains clearly determined to continue to support growth. The MPC is likely to leave key rates unchanged in the near future. They are expected to maintain the repo rate status quo for at least the remaining months of 2021-22, if not longer.
While RBI has reiterated its GDP growth forecast of 9.5% for FY22, the quarterly growth path remains interesting. The central bank has revised its GDP growth forecast for the first quarter of FY22 upwards by almost 300 basis points (bps), while its forecasts for each of the three following quarters have been revised downwards by 50-90 bps from the previously forecast levels. Hence, policymakers are more confident about Q1 growth pressures, based on high-frequency data and statistical effects on a significantly favorable basis. However, they are cautious about their growth expectations in the coming quarters.
It is important that the RBI is forecasting low GDP growth of 6% for the second half of the current financial year, despite a meager growth of 1.1% in the second half of FY21. This underlines once again the strong statistical effects (of around 16% GDP contraction in H1 FY21) behind a likely high growth pressure in the first half of FY22.
In fact, the tough second wave of Covid is having an impact on medium-term business and consumer confidence. RBI’s own surveys indicate that urban consumer confidence reached a multi-year low about a year ago during the first Covid-19 wave and has barely improved since then. In the second wave, the mood of households in rural areas suffered more. As a result, once the base effect disruption subsides, only a modest recovery in real private consumer demand, which typically accounts for two-thirds of India’s GDP, can be expected. Overall, we see significant downside risks to RBI’s GDP growth forecasts.
With a stronger global recovery, rising commodity prices, sticky food inflation and a surge in domestic fuel prices, inflation could stay too high for the RBI. The CPI averaged 5.7% in the first quarter and is forecast at 5.9% in the second quarter. While the RBI’s CPI forecasts are higher than road expectations, their assessment of the balanced risks of this forecast of 5.7% for FY22 does not rule out a further upward trend.
However, despite significant threats that CPI inflation pressures will exceed the central bank’s “upper tolerance band” in the coming months, it is most appropriate that the MPC expressed its tendency to see through the same thing and continue to support the growth rebound, especially in light of the Dominance of the supply-side factors that recently fueled inflation. This is in line with the agility the central bank has shown since the outbreak of the pandemic in March 2020 in using both conventional and unconventional monetary policy instruments.
Several unconventional policy initiatives in recent times have sought to increase the flow of liquidity to small businesses and MSMEs. Against this background, an extension of the “On-Tap TLTRO” window, a relaxation of MSF financing by a further three months and an extension of the deadline for achieving the financial parameters within the scope of the processing framework for Covid-related stress by a further six months are to be expected welcome in the context of small business recovery and stressed businesses.
Ensuring the stability and smooth functioning of financial markets has been one of the RBI’s priorities throughout the pandemic. Together with OMOs and Operation Twist, the increase in G-SAP and the inclusion of SDLs had helped cushion bond yields in light of the risks of larger borrowing and generally heightened uncertainty. While the additional volume of variable reverse repo rate auctions may trigger some knee-jerk reactions, BI is expected to remain cautious and uninterrupted. Although the macro backdrop has further complicated in recent months, the RBI’s countercyclical determination appears strong overall. With the recovery still hesitant and uneven, it is important for policymakers to continue to support growth and continue to focus on policy initiatives for better credit flow, including for MSMEs, smaller businesses and strained sectors, which are more likely to be use unconventional tools.
The author is Chief Economist and Head of Research at Bandhan Bank
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