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MPC Holds Rates, Maintains Accommodative Stance

By Sunil Garodia
First publised on 2021-02-06 07:07:09

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Author of Cyber Scams in India, Digital Arrest, The Money Trap and The Human Hack

The MPC of the RBI decided to hold interest rates in its meeting yesterday. It also voted unanimously to maintain the accommodative stance for as long as it is necessary to revive the economy. The committee pegged growth at 10.5 percent in 2021-22, which is lower than the 11.5 percent put out by the IMF. The committee also lowered its inflation forecast from 5.8 percent in December to 5.2 percent now. These decisions on part of the MPC suggest that for now, monetary policy will be guided by growth considerations and other factors will come into play once economy is well on the path of robust recovery.

Since inflation is showing a downtrend - with prices coming down and even future trends showing moderation - the committee did not have much trouble in maintaining this stance. Although global oil prices are firm and the prolonged farmers' stir in India not showing any signs of being resolved soon, as demand increases, idle capacity will be pressed in service and there will be no scarcity of products. With logistics constraints also getting resolved slowly, markets will be flush with products and there will not be any undue pressure on prices. RBI expects inflation to further reduce to as low as 4.3 percent by the third quarter of 2021-22.

Another thing that the RBI assured all was on liquidity. There were concerns in some quarters that the apex bank would squeeze out liquidity to prevent the unrealistic premium being attached to financial assets. RBI governor Shaktikanta Das had warned recently that financial assets were overpriced. But the RBI said that it would stagger the hike in the cash reserve ratio to ensure that there was ample liquidity in the system.

Das also wanted the continuation of the current framework in setting monetary policy. He said "the experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the inflation targeting framework, barring the COVID-19 period, need to be reinforced in the coming years." Although some experts want the RBI to move away from the inflation targeting framework, allowing the MPC greater space to remain accommodative, one feels that the RBI governor is right. The government must heed Das and must not introduce unpredictability in monetary policy by frequently changing the framework. 

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