Finance Ministers generally look for endorsement of their Budget exertions from two entities — the stock market and the central bank. The first comes right away, practically simultaneously, alongside the Budget. The second, from the central bank, comes in its monetary policy announcement immediately following the Budget.

Various stakeholders draw their cues from the signals that come from these two informed assessments. While market reactions are easily gauged by index and individual stock movements, the central bank’s statement and the Governor's comments are carefully parsed. They are read to detect if the central bank is fully on board with the government plans or whether there are any reservations. Of course, even when there are misgivings, they are always couched in mild and respectful language.

The Finance Minister’s Budget has got the unequivocal thumbs up from both this time. The market was up by a whopping 5 per cent in a single day — impressed apparently by the focus on growth, infrastructure spending, privatisation plans and the attempt at transparency on the fiscal deficit numbers.

Today, the RBI monetary policy committee has provided its own support. It has left the key repo rate unchanged at 4 per cent. The RBI has already cut this rate by 250 basis points over the past two years, with about 115 bps of this coming in the past year in response to the pandemic. The policy guidance is in line with its stance of remaining ‘accommodative' as long as necessary. Inflation numbers as evidenced by the movement in consumer price index (CPI) are relatively mild and within the comfort zone for the central bank. The projected CPI for the first half of the next year also reflects an easing to a range of 5 per cent and moving further down to 4.3 per cent in the third quarter.

Facilitating massive borrowing

The key question in this policy was what the RBI would say about the government borrowing programme. The government is set to borrow about ₹12 lakh crore or about ₹25,000 crore every week in the next year. The RBI has provided an assurance that it will manage it in a non disruptive manner. This was par for the course.

And then the RBI pulled out a rabbit from its hat by announcing direct retail participation in government bonds buying through the RBI. This is no doubt a very important step — and at least in theory, helps diversify the lender base for the government. In the long run, this may help provide more stable interest rates for both the government and the entire economy. This is also a good option for high networth individuals who may be uneasy with the vertiginous climb of the stock market indices currently.

However, it bears remembering (even as one receives the news with optimism) that past experience with regard to fostering retail participation through various other agencies have been lukewarm. Also, these measures, welcome as they are, will take time to fructify. It may be a bit too much to expect that retail investors are going to queue up and jostle outside RBI doors to buy government bonds this year (like they did to return old currency notes four years ago !)

The economy is set to begin recovering from the troughs of the past two years. As the Governor put it succinctly in his concluding remarks, the only way for the economy to go now is — up. How the RBI handles the massive borrowing programme as well as rising corporate demand for credit — without letting interest rates get out of hand — is going to be it's biggest challenge in the year ahead. The bond markets remain sceptical if the initial movements are any indication.

(The writer is a Mumbai-based freelance journalist)

Related Topics
comment COMMENT NOW