What has been the monetary policy committee’s stand in the recent meeting?

The MPC decided to focus on supporting economic growth in the December policy meeting. Any increase in policy rates — through which the central bank controls interest rates in the economy — tends to impact growth. This is because as interest rates increase, borrowing costs for all kinds of loans including housing, personal, corporate and credit card loans increase in tandem. Consumers and companies cut back on their purchases, affecting the demand for all goods and services produced in the economy, thus impacting growth. The RBI has decided that supporting GDP growth is paramount at this point in time as the economy slowly recovers from the impact of the pandemic. It has therefore maintained status quo, or decided not to increase any of the policy rates including the repo, reverse repo, marginal standing facility rate or the bank rate. It has also chosen to continue its “accommodative” stance.

Is it worried about possible slowdown in growth due the Omicron?

Definitely. The threat from the Omicron variant of Covid-19 seems to have been a major influencing factor in this policy. Uncertainty in growth due to lockdowns or border closures due to this variant is likely to impact global economic activity in the third quarter of FY22. It’s mainly due to this that the GDP forecast for Q3 has been revised lower to 6.6 per cent from 6.8 per cent projected in the previous meeting.

What is RBI’s view on inflation?

The RBI has decided to be rather sanguine about inflation and has retained the inflation forecast for 2021-22 at 5.3 per cent; unchanged from the October policy. However, with fuel prices beginning to move higher once again, global edible oil price remaining elevated, and core inflation continuing to be high, inflation is likely to become a pain-point going ahead. Further supply chain problems and a strong revival in demand as the pandemic abates will apply upward pressure on prices. The RBI could be behind the curve, with its inflation forecast.

Is the RBI resorting to normalisation by stealth?

The government has been infusing tremendous amounts of funds into the economy since March 2020 in order to support all the people and businesses who have been financially hit by the pandemic. As the pandemic wanes, these funds need to be sucked out gradually, else the surplus liquidity will fan inflation, debase money and artificially lower interest rates. One way to suck this liquidity is by hiking the reverse repo rate or the rate at which the RBI borrows from the banks. But instead of pushing through a reverse repo rate hike, the RBI is instead trying to shift the surplus liquidity to variable reverse repo rate (VRRR) auctions. The RBI has better control over rates at the VRRR auctions and it also has the flexibility to change the tenure of the securities in these auctions. Short-term rates are already edging up slightly due to this shift to VRRR auction, without the RBI having to increase reverse repo rate. That is what people mean when they say that the RBI is normalising by stealth.

Why is the central bank doing this?

It is doing so to avoid sending any signal to the bond market that it is tightening the monetary policy which will cause sovereign bond yields to rise and thereby exert pressure on interest rates.

When is the RBI expected to increase repo rate?

Many experts believe that the reverse repo rate could first be increased in the February meeting which will follow the Union Budget. A repo rate hike is not on the cards as of now. But if other global central banks such as the US Federal Reserve begin hiking interest rates, RBI will also have to follow suit. Otherwise, foreign investors will start selling the less attractive Indian bonds.

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