Read Editorial with D2G – Ep 531

Read Editorial with D2G – Ep 531

RBI’s balancing act

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In line with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted unanimously (without opposition; with the agreement of all people involved) in its first policy meeting of the current financial year to leave the benchmark policy repo rate unchanged. The committee also decided to maintain its accommodative (willing to fit in with someone’s wishes or needs) stance (the way in which someone stands, especially when deliberately adopted (as in cricket, golf, and other sports); a person’s posture) until “the prospects (the possibility or likelihood of some future event occurring) of the recovery are well secured”.

Considering that the second wave of COVID-19 infections has created significant uncertainty over the economic trajectory (the path followed by a projectile flying or an object moving under the action of given forces) going forward, even as retail inflation is expected to remain elevated (situated or placed higher than the surrounding area) in the near future, the MPC, by shifting from a “time-based” to a “state-based” forward guidance, has given itself more room for manoeuvre (a carefully planned or cunning scheme or action).

Alongside, the RBI governor, Shaktikanta Das, announced a slew (turn or slide violently or uncontrollably) of measures aimed at easing financial conditions and lowering borrowing costs. Das announced a G-sec acquisition (a purchase of one company by another) programme (G-SAP) through which the central bank will purchase Rs 1 lakh crore of government securities in the first quarter of the current financial year, expanding on the existing (occur or be found, especially in a particular place or situation) toolkit for managing long-term yields.

The programme, which is meant to signal the central bank’s intention of supporting the bond market, will help calm the markets, and bring down the term premium (an amount to be paid for a contract of insurance). By laying out what is essentially a calendar of the RBI’s operations in the secondary market, it provides greater clarity (the quality of being coherent and intelligible) to market participants who are worried about the government’s massive borrowing programme. Bond yields have fallen post the announcement.

But, even as the central bank continues to attach primacy to growth considerations, and rightly so, it must be mindful of the inflationary (characterized by or tending to cause monetary inflation) pressures in the economy. The rise in global commodity prices, coupled with the possibility of disruptions (disturbance or problems which interrupt an event, activity, or process) in supply chains, leading to a situation of inflation sustaining above the upper threshold (a point of entry or beginning) of the inflation targeting framework alongside weak growth, could only complicate (make (something) more complicated) matters for the central bank. Balancing multiple objectives will be difficult.

On the growth front, the central bank has retained (continue to have (something); keep possession of) its earlier projection of 10.5 per cent for the current financial year, which is far more conservative (averse to change or innovation and holding traditional values) than the International Monetary Fund’s recent assessment, which pegs (fix, secure, or mark with a peg or pegs) growth at 12.5 per cent. However, the risks to the economic recovery have increased considerably in recent weeks.

The sharp surge (a sudden powerful forward or upward movement, especially by a crowd or by a natural force such as the tide) in COVID-19 cases, and the imposition (a thing that is imposed, in particular an unfair or unwelcome demand or burden) of localised restrictions, could adversely affect economic activity.

Supply side disruptions, as well as subdued (quiet and rather reflective or depressed) demand could delay the economy’s return to normalcy (the condition of being normal; the state of being usual, typical, or expected). The primary objective of policy should be to dramatically (in a way that relates to drama or the performance of drama) scale up the vaccination drive to cover a larger section of the population.

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