‘RBI policy supportive of both stable and buoyant markets, with its moderating implications for rates’

The RBI policy announcement has left the repo rate unchanged at 4 percent, and it has decided to continue the accommodative stance of the policy “as long as it is needed”. This is quite in line with what market participants expected from the RBI. The potential for inflationary pressures has also received attention from the RBI while persisting with the current monetary stance.

It is interesting to look at the RBI perspective on growth and inflation.

“The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth. At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support,” the policy statement said.

This summarizes the background against which this policy announcement has been made. Brent has moved up close to $50 a barrel, and it seems to be wanting to stay somewhere there supported by the OPEC+ output cut, and the peak winter that is fast approaching in North America and Europe.

The outlook for domestic growth shared by the RBI reflects the optimism displayed by the markets too. But we need to see the recovery in economic growth self-sustaining and firm on its legs.

A reasonable inference that could be made out of the current policy is that probably we have come to the last leg of the rate cut cycle with the RBI accepting that the higher levels of inflation actually leaves, little or no space as of now, for any rate adjustments.

With huge inflows from overseas investors, the liquidity conditions in the domestic market will remain in surplus. But it is expected that RBI may act to regulate the liquidity build up in the short-term money market by enhancing the liquidity sterilisation actions. These inflows will help the RBI take care of the debt management for the government with greater ease, and it will also reduce the pressure on the bond market.

Despite all the favourable factors, the pick-up in credit mainly on the corporate side is slow though retail credit is gradually improving.

The policy reflects the determination of the central bank to continue with the accommodative policy, while being cautious about the inflationary pressures that are building up. But growth gets the priority once again, and rightly so. That all the liquidity measures initiated earlier will more or less continue to be in force, is a consolation, especially in a high inflation scenario.

The economic growth projections too mirror the gradually improving ground conditions, with the overall growth for this year put at -7.50 percent, with mildly positive growth for Q3 and Q4. The features and contents of the policy gives the reassurance that lower rates and the plenty in liquidity will continue for a longer time period, as long as it is needed or till the time inflation rises so much as to derail it.

The policy is supportive of both stable and buoyant markets, with its moderating implications for rates.

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