Tightrope walk

| Updated on October 08, 2021

Tough times Given the looming inflationary pressures, RBI Governor Shaktikanta Das will have to make some difficult decisions in the days ahead   -  PTI

Amidst a skittish global economic climate, the MPC had little option but stick to the status quo

The Monetary Policy Committee (MPC) might have chosen to hold rates for the eighth consecutive time at its bi-monthly meeting, but it is right in implicitly recognising that it may not be able to sustain its accommodative stance for long. The global environment is decidedly inflationary: oil prices are at their highest in three years, and US inflation is at a 30-year high. As a result, 10-year US Treasury yields are up by about 30 basis points since August to 1.5 per cent, not least because of the Fed and Bank of England hinting at a reversal in stance. Meanwhile, US Treasury Secretary Janet Yellen is among market observers who concur that commodity-driven inflation is not likely to be as “transitory” as hoped earlier. As a result of rising energy prices, China’s factory output is likely to suffer in the last quarter of this calendar year, even as demand in the US and EU picks up in the wake of pent-up sentiment. As a result of this intriguing interplay of forces of supply and demand, global monetary policy responses too are varied. As the RBI Governor has observed, some countries with strong demand have raised rates, others lowered them, while India which faces both inflation and growth worries is in pause mode.

India is truly between a rock and a hard place. In a skittish global environment, the rupee is down to five-and-a-half month lows, while emerging market currencies have slipped against the dollar. This sets the limits on accommodation, as does a rise in global bond yields. To deal with inflation, the MPC has opted for “calibrated” liquidity management. It has not announced another G-SAP (G-Secs Acquisition Programme) schedule. In effect, it is confident that government borrowings will not require bond market support, as there is sufficient liquidity surplus anyway. In fact, it has decided to mop up liquidity through enhanced fortnightly variable reverse repo rate auctions, besides considering 28-day VRRR auctions. The accommodation continues through an extension of long-term repos for small finance banks.

Even as the MPC carries on with this mix of approaches, it is worth noting that it has done its utmost to spur growth since the onset of the pandemic, by cutting rates by 115 basis points. It cannot deal with imported inflation, except by allowing the rupee to appreciate. If global rates rise in the event of an extended spell of inflation globally, India may have to raise rates — to protect the rupee and capital flows. That may impact exports, now a bright spot. An autumn of apprehension lies ahead. The onus will be on fiscal instruments to push growth and contain inflation.

Published on October 08, 2021

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