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Staying accommodative: on RBI keeping interest rates unchanged

The RBI cannot afford to drop its guard on price stability while in search of growth

Armed with a renewed mandate to contain inflation within a 2 percentage point range of the target 4%, and mindful of the pandemic’s latest wave, the RBI’s monetary policy committee has opted to reaffirm its growth-supportive “accommodative stance” and keep interest rates unchanged. The MPC, which met for the first time in the new financial year, also maintained its projection for GDP expansion in the current fiscal at 10.5%, notwithstanding the risks to the forecast from the current upsurge in novel coronavirus cases and associated localised lockdowns. Explaining the rationale for its policy stance of being prepared to stay accommodative for ‘as long as necessary’ to ensure that economic growth becomes ‘durable’, the committee was unambiguous that its actions were born of the need to stay supportive at a time when there was a real threat that “the renewed jump in COVID-19 infections… could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy”. That consumer confidence has dipped, as the MPC noted, is a clear sign that uncertainty clouds the outlook for growth. Add to this the fact that IHS Markit’s Manufacturing Purchasing Managers’ Index (PMI) survey for March revealed that business sentiment had slid to a seven-month low, even as the research firm’s subsequent India Services PMI report showed both manufacturers and services companies continued to shed jobs for a thirteenth month. With jobs and incomes remaining under stress for millions, and uncertainty over the efficacy and safety of the vaccines persisting even as authorities seek to ramp up the immunisation drive, it is hard to foresee consumption demand rebounding to pre-COVID levels any time soon.

The MPC’s central remit on inflation also remains a concern. Core inflation, the panel observed, had hardened across the board and increased by 50 basis points to touch 6% in February. The RBI is cognisant of the fact that there are both upside and downside pressures that may impact the trajectory of retail inflation. Governor Shaktikanta Das has flagged the critical significance that this year’s monsoon rains will have on food prices, which have been a recent source of upward pressure on price stability. And both Mr. Das and the broader committee have stressed the vital need for the Centre and States to initiate some coordinated action to ease the tax burden on petroleum products, given the ripple ‘second-round’ effects that the high costs of transport fuels have on overall inflation. High international commodity prices and logistics costs are also threatening to push up input costs across the manufacturing and services sectors, posing a real challenge to policymakers, given that it is far harder to influence these variables. With the RBI’s own March survey on inflation expectations showing that urban households expect prices to accelerate over a one-year horizon, monetary authorities can ill afford to drop their guard on price stability. For, at stake is their hard-earned credibility.

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