Difficult balance

The Monetary Policy Committee’s decision to maintain status quo in policy rate and retain accommodative policy stance is as expected. The surge in cases and fatalities due to the second wave of the pandemic and the regional lockdowns imposed as a response to the surge, have impacted economic activity severely. The monetary policy is therefore less sanguine about growth, with the RBI wanting “to revive and sustain growth on a durable basis.” The RBI’s concern arises from the sharp downward revision in GDP growth for the first quarter of this fiscal from 26.2 per cent to 18.5 per cent. The central bank is projecting a pick up in the second half of the current fiscal, resulting in GDP growing 9.5 per cent in FY22. But given the risks ahead, the central bank has vowed to keep its monetary stance easy as long as needed.

The RBI is, however, downplaying the inflation risk. It acknowledges that increase in global crude and commodity prices and logistics cost is worsening cost conditions, but it expects weak demand conditions to temper pass-through to consumer inflation. If the demand revival in the second half of the year is as strong as projected by the RBI, there could be a strong uptick in inflation, requiring a revision of monetary stance. The central bank has however been fairly successful in anchoring the 10-year bond yield at 6 per cent and this has helped keep borrowing rates low in the economy. It is continuing its efforts at yield curve management, with the announcement of G-SAP 2.0 for the second quarter of 2021-22 amounting to ₹1,20,000 crore. This is likely to keep bond yields in check, even as the risk of increase in government borrowing for this fiscal grows.

The special liquidity widow created for banks to borrow at repo rate to lend to contact intensive sectors such as hotels, restaurants, tourism, travel, spas and saloons is welcome as businesses in these segments have been badly impacted. But the amount of ₹15,000 crore earmarked for the scheme may not suffice given the extent of stress in these sectors. The central bank also needs to ensure effective implementation of the scheme. Extending a special liquidity facility of ₹16,000 crore to SIDBI to on-lend to MSMEs in credit deficient regions is a good move which will help the unorganised sector hurt by the ongoing curtailment in activity. Increasing the maximum exposure under the Resolution Framework 2.0 from ₹25 crore to ₹50 crore is also a good idea as it will help alleviate the problems of a larger number of stressed borrowers. The RBI is clearly doing everything it can to ensure financial stability and easier, cheaper funds. The Centre has to now step up to the table and play its part.

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