Editorial: Cautious optimism

The Reserve Bank of India’s decision to keep the repo rate unchanged at 4% for the 10th time in a row and to maintain the accommodative stance reflects a more cautious approach in the wake of an erratic economic recovery and the continued impact of the pandemic. The Monetary Policy Committee (MPC) in its last […]

The Reserve Bank of India’s decision to keep the repo rate unchanged at 4% for the 10th time in a row and to maintain the accommodative stance reflects a more cautious approach in the wake of an erratic economic recovery and the continued impact of the pandemic. The Monetary Policy Committee (MPC) in its last meeting of the ongoing financial year has adopted a wait and watch policy. The justification for not tinkering with the interest rates is that such an approach was needed at this juncture in order to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy while ensuring that inflation remains within the target going forward. The status quo on interest rates was warranted for a durable and broad-based recovery after taking into consideration the outlook for inflation and growth. It is clear that unlike most of the other global central banks, the RBI wants to accord primacy to growth considerations while downplaying inflationary pressures. The immediate fallout of the central bank’s decision to retain the repo rate — the rate at which it lends funds to banks — is that the banks will not hike lending and deposit rates and EMIs on loans will remain unchanged. The RBI has projected a 5.3% retail inflation for the current financial year 2021-22, despite rising crude oil prices, and 4.5% for the next fiscal.

The expectation is that the inflation is likely to moderate in the first half of 2022-23 and move closer to the target rate, thereafter providing room to remain accommodative. However, the problem with this rather optimistic projection is that it downplays the risks to inflation, stemming especially from fuel prices, and global commodities. International crude oil prices are already hovering above $90 per barrel and might go up further. Food inflation is also expected to increase further due to supply bottlenecks and adverse weather conditions on the back of the waning base effect. While the economy has been showing signs of revival, the first advance estimate of GDP for the current fiscal shows that it has barely reached the pre-pandemic level. In some contact-intensive sectors, the revival has been slow and is yet to reach the 2019-20 level. These are the sectors that are employment-intensive, and two years of continuous drag has created a huge burden of unemployment. Virtually all the growth engines, except public investment and exports, have been struggling to restart while both the private consumption and investments are yet to revive. By RBI’s own estimates, the growth in the first half of next year will remain elevated, driven by the base effect, but will go down sharply thereafter to 4.3% to 4.5% in the second half of the year. This forecast highlights concerns over India’s growth trajectory.

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