February 6, 2021 4:00:48 am
In line with expectations, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) voted unanimously to maintain status quo on interest rates in its latest meeting. The benchmark policy repo rate stands at 4 per cent. Alongside, the committee members voted unanimously in favour of maintaining the accommodative stance till as long as necessary (stretching into the next financial year). The message from the forward guidance provided is that growth considerations will continue to drive monetary policy “till the prospects of a sustained recovery are well secured.”
The threat of inflation remaining elevated, complicating policy choices for the MPC, appears to have receded for now. Retail inflation, as measured by the consumer price index, fell sharply to 4.59 per cent in December, after remaining above the upper band of the MPC’s inflation targeting framework for the better part of the last year. The trends in prices in the weeks thereafter seem to signal a continuing moderation. The RBI has also lowered its inflation forecast for the fourth quarter of the current financial year from 5.8 per cent in its December policy to 5.2 per cent now. In the months thereafter, it expects inflation to range between 5-5.2 per cent, trending downwards to 4.3 per cent by the third quarter of 2021-22, easing the committee’s constraints. On the growth front, while the central bank noted that “signs of recovery have strengthened since the last meeting of the MPC”, it appears to have been conservative in its assessment of the trajectory ahead. It now expects the economy, aided largely by a favourable base effect in the first half of the year, to grow at 10.5 per cent in 2021-22 — lower than the International Monetary Fund’s projection which pegged growth at 11.5 per cent. Alongside, the RBI governor also appears to have allayed apprehensions among market participants on the central bank’s views on liquidity, assuring them of ample liquidity through staggering the hike in the cash reserve ratio. Perhaps providing an open market operations calendar will help provide a more explicit indication to this effect.
Over the last several months, with retail inflation persisting above the upper limit of the MPC’s framework, there have been calls for diluting the inflation targeting framework, allowing the MPC greater space to remain accommodative. But doing so would be a mistake. Frequent revisions of the target are unlikely to help stabilise expectations. They would inject a degree of unpredictability in monetary policy. While the government is yet to spell out its views on the issue, in his remarks, the RBI governor has come out strongly in favour of continuing with the current framework.“The experience with successfully maintaining price stability and the gains in credibility for monetary policy since the institution of the inflation targeting framework, barring the COVID-19 period, need to be reinforced in the coming years,” he said.