A monetary policy of continuity with change

This time, RBI's rate-setting body is not only talking about sustaining growth but also reviving it

The no-action, status-quo monetary policy of the Reserve Bank of India (RBI) signals continuity with change.

Let’s take a close look at what has been continuing and what has changed.

One, the accommodative stance of the monetary policy continues.

The Monetary Policy Committee (MPC), RBI’s rate-setting body, has unanimously decided to continue with the accommodative stance as long as necessary, while the key policy rates remain unchanged. It has also stuck to its data-based guidance as opposed to the time-based guidance that it was giving till February.

However, one word has made a big change. This time it is saying the accommodative stance will continue for long to revive and sustain growth on a durable basis, while ensuring that inflation remains within the target, going forward.

In April, it had committed to continue with the accommodative stance as long as necessary to sustain growth on a durable basis while ensuring that inflation remains within the target going forward. This time, it is not only talking about sustaining the growth but also reviving it — bringing back the stance of the February policy.

This is an admission by the Indian central bank that the green shoots, which it had seen in April, aren’t there anymore. The second wave of Covid-19 pandemic has attacked the economy badly.

Two, this has led to the second change in the policy. Since the February MPC meeting, the RBI has been maintaining the projection for real GDP growth for fiscal year 2021-22 at 10.5 per cent — 26.2 per cent in the first quarter; 8.3 per cent in the second; 5.4 per cent in third; and 6.2 per cent in the fourth.

Despite the disruption in the economy on account of the second Covid wave, its annual report, released last month, has stuck to the same projection even though every agency has been paring it. This time, the RBI, too, has cut its growth projection to 9.5 per cent — 18.5 per cent in the first quarter; 7.9 per cent in second; 7.2 per cent in third; and 6.6 per cent in the fourth.

Look at the sharp downward revision of growth in the first quarter — shaving it off by a quarter. While vaccination holds the key, the RBI has also called for policy support from all quarters — including fiscal and monetary.

Three, while there is a one full percentage point cut in the growth projection, the inflation projection has been raised by just 10 basis points, from 5 per cent to 5.1 per cent. One basis point is a hundredth of a percentage point.

The RBI has also cut its growth projection to 9.5% — 18.5% in the first quarter; 7.9% in second; 7.2% in third; and 6.6% in the fourth

Even though the wholesale price inflation climbed to an 11-year high of 10.49 per cent in April, after an eight-year high of 7.39 per cent in March, India’s consumer price index-based retail inflation eased to 4.29 per cent in April from 5.52 per cent in March, primarily due to reduction in food prices. The RBI tracks retail inflation and its mandate is to maintain retail inflation between 2 per cent and 6 per cent.

The risks to the inflation projection are evenly balanced. While rising crude prices could put upward pressure, the lack of demand will even it out.

Four, there is continuity in the RBI’s secondary market government securities acquisition programme, or G-SAP. In April, it had announced a Rs 1 trillion G-SAP 1.0 programme for the first quarter. This will continue in the second quarter. In fact, the RBI has raised the size of the G-SAP 2.0 to Rs 1.2 trillion.

Despite this, the bond market was not exactly cheerful on Friday. Why? This is because the latest Rs 40,000 crore bond buying programme under G-SAP 1.0 on June 17, its third tranche, contains Rs 10,000 crore purchase of state development loans.

One can presume that more state development loans will be included in G-SAP 2.0. Following this, the net buying of central government securities will be much less than Rs 1.2 trillion.

The state loans have to be included in the bond buying programme as otherwise the spread between the yield of central and state government papers, which has been widening, will expand further.

Finally, the talk about unwinding or withdrawal of accommodation is no more on the RBI radar. It’s unlikely to return in the near future. The RBI probably can’t afford to talk on this during the current year when everyone is rushing to cut the growth projections at regular intervals.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd | His latest book: Pandemonium: The Great Indian Banking Story | To read his previous columns, please log on to www.bankerstrust.in | Twitter: TamalBandyo