Monetary Policy Accommodative At The Core, Policy Turns To Equitable

The policy announcement from the RBI, after the MPC meeting, has left all the key policy rates unchanged. It has reaffirmed the commitment to continue with the accommodative stance. It was expected that the RBI may not bring about any changes in the policy as such due to two factors, (i) there was an interim announcement of certain measures by the Governor a couple of weeks back, and (ii) there was no deterioration as such of any major macro variables, especially, the price level.
The growth forecast for the current year has been downgraded to 9.50% from the previous 10.50%, mainly due to the factoring-in of the possible effects of the second wave. It may be recalled that many research firms and analysts have already lowered their forecast by 1% to 2%.

In the RBI’s view the risks to inflation are more or less balanced, while the CPI for the whole year may be at 5.10%, the Q2 inflation has been put at 5.40% as against the previous forecast of 5.20% for the same period. The high fuel prices, with brent at US$ 71 per barrel, may be an issue which is likely to unravel gradually. The fall in demand due to the second wave of the pandemic could be a moderating influence on the price level, as the RBI puts it, the weak demand may temper the price level. Inflationary pressures are likely to stay. RBI has highlighted the need for central and state governments to take steps to stem the rise in prices.

“Going forward, the inflation trajectory is likely to be shaped by uncertainties impinging on the upside and the downside. The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook. Excise duties, cess and taxes imposed by

the Centre and States need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices. A normal south-west monsoon along with comfortable buffer stocks should help to keep cereal price pressures in check.”

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