RBI Continues To Bat For Growth, Downplays Inflationary Pressures
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By Our Editorial Team
First publised on 2022-02-11 06:16:24
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Contrary to expectations, the Monetary Policy Committee (MPC) of the RBI did not increase the reverse repo (rate at which the RBI borrows money from banks) rate. In fact, the MPC maintained status quo on key policy rates and more importantly, also continued with its accommodative stance, saying that growth was more important than inflation, which in any case, according to the MPC was likely to ease further in the next fiscal.
In doing so, the MPC has bucked the global trend where central banks have either tightened interest rates or have indicated that they will do so in the near future. Other central banks have chosen to fight inflation by squeezing out the ocean of money floating in financial markets in a bid to tame inflation. But for the RBI, growth remains the primary concern and it is willing to go with marginally high inflation now as it expects it to come down in two or three quarters.
The RBI's expectations on inflation are valid. Crude prices, ruling at a high of $93 per barrel now, are expected to ease to around $70 dollars going forward. This would bring down costs and ease the pressure on inflation. With the lifting of Covid restrictions, supply chains have also started functioning normally. That would also help.
Since the RBI's growth projections for FY 2022-23 at 7.8% are much below the numbers projected by both the Internal Monetary Fund (IMF) (9%) and the Economic Survey (8-8.5%), it has kept the accommodative stance to push growth for "as long as necessary", as the RBI governor Shaktikanta Das said. There are some sectoral imbalances in the growth that is happening and some sectors have not yet shown signs of returning to normalcy. Further, the informal sector is hugely distressed.
Another good impact of the accommodative stance was that it immediately had a calming effect on the band markets as the 10-year G-Sec yield fell by nearly seven basis points. The bond markets were on fire as the Union Budget had projected huge borrowings by the government to fulfill its infrastructure investment commitments in the next fiscal.
At this point of time, the MPC's decision to maintain status quo on policy rates and continuing with the accommodative stance are correct as growth needs to be prioritized. But later, if oil prices do not come down and if investments by the government in the next fiscal push inflation further by putting more money in the hands of people, the RBI can always take corrective measures.
