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Monday, November 29, 2021

Global central banks unwinding stimulus: RBI

“There is a risk of faster policy normalisation by major central banks leading to tightening of financial conditions and stifling of growth impulses,” the RBI said in its ‘State of the economy’ report.

By: ENS Economic Bureau | Mumbai |
November 16, 2021 4:00:13 am
It proposed that disbursement of loans should be directly into the bank accounts of borrowers. (File)

Pointing to the hardening of interest rates across the world, the Reserve Bank of India (RBI) has indicated that a distinct shift towards unwinding of pandemic-led stimulus is taking hold on the policy front globally as inflation worries are rumbling more clearly than before.

Many global central banks have started hiking interest rates. “There is a risk of faster policy normalisation by major central banks leading to tightening of financial conditions and stifling of growth impulses,” the RBI said in its ‘State of the economy’ report.

Among the emerging market economies, Brazil remains the most hawkish central bank, raising its policy rate for the sixth time since March and at a much higher magnitude of 150 bps – the highest hike in almost 20 years – taking the total cumulative increase in 2021 to 575 bps. Russia too, effected its sixth consecutive rate hike but at a lesser magnitude of 75 bps, for a cumulative increase of 325 bps in 2021, the RBI said report said.

Hungary raised rates by 15 bps, its fifth consecutive hike in 2021, while Chile effected its third consecutive rate hike at a higher magnitude of 125 bps in October. Poland increased rate for the second consecutive month in November by 75 bps, the RBI said.

On October 8, while unveiling the monetary policy, RBI Governor Shaktikanta Das had hinted at the road map for unwinding of the accommodative monetary policy in India. “This process has to be gradual, calibrated and nondisruptive, while remaining supportive of the economic recovery,” Das said.

The Reserve Bank of Australia also dumped its policy of yield curve control as a signal to act against a post-pandemic surge in prices. The Monetary Authority of Singapore tightened its monetary policy by allowing the Singapore dollar (S$), in nominal effective terms, to appreciate mildly, while the Czech Republic effected its fourth rate hike at a much higher magnitude of 125 basis points. The European Central Bank (ECB), on the other hand, held on to its accommodative policy stance in October, while continuing with asset purchases at a moderately lower pace in Q4 than Q2 and Q3, as was decided in its September meeting.

The Bank of England too, kept its policy rate and asset purchase programme unchanged in its November meeting, confounding market expectations of a rate hike. In a sharp departure, Turkey cut its policy rate by 200 bps, its second rate cut in a row, which took the total cumulative rate change for the year to (-)100 bps.

The US Fed, in its November meeting, announced the tapering of its asset purchases at a pace of US$ 15 billion per month beginning mid-November. From the current pace of monthly purchase of US$ 80 billion of Treasury securities and US$ 40 billion of agency mortgage-backed securities (MBS), the taper will be of US$ 10 billion in Treasury securities and US$ 5 billion in agency MBS. The Bank of Canada in its October meeting left its policy rate unchanged but ended its weekly bond-buying programme of C$ 2 billion.

However, the RBI report said the Indian economy is clearly differentiating itself from the global situation, which is marred by supply disruptions, stubborn inflation and surges of infections in various parts of the world. “The global economic outlook remains clouded by uncertainty with headwinds from multiple fronts at a time when many economies are still struggling with nascent recoveries,” it said.

“Domestically, there have been several positives on the COVID-19 front, in terms of reduced infections and faster vaccinations. Mobility is rapidly improving, the job market is recouping and overall economic activity is on the cusp of a strengthening revival,” the RBI said. Overall monetary and credit conditions stay conducive for a durable economic recovery to take root, it said.

With the onset of the festival season, Google and Apple mobility indices recorded a marked improvement during October-November. Google mobility index for retail and recreation activities normalised for the first time since the onset of the pandemic, and mobility around grocery and pharmacy, parks and transit stations surged beyond the pre-pandemic baseline, the RBI said. “Apple mobility index, also remained elevated propelled by an increase in activity across all major cities,” it said.

On the recovery pace, the RBI said India stands resolute in its quest for speedy revival, though the speed and pace of recovery remains uneven across different sectors of the economy. The outlook remains overcast by the future course of pandemic and global supply disruptions, it said.

According to the central bank, the global economic outlook remains shrouded in uncertainty, with headwinds from multiple fronts. In India, the recovery gained strength, though the speed and pace of improvement remains uneven across different sectors of the economy. “Indicators of aggregate demand posit a brighter near-term outlook than before,” it said.

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