Still at ease

With consumer price inflation dipping in December and a narrative building on a V-shaped recovery, there would have been little justification for the Monetary Policy Committee (MPC) to resume its rate cuts in its latest review. It is, therefore, no surprise that it has held key policy rates. If at all there was a case for tinkering, it was on the continuation of its extra-accommodative liquidity stance, in a visibly reviving economy. But the MPC has chosen to stay the course on this, too, making a commitment to continue with this stance through this fiscal and the next.

The MPC has used benign inflation projections for this fiscal (revised down from 5.8 to 5.2 per cent for Q4) to bolster its case for low rates, while admitting that there could be upside risks from input cost pressures and improving demand. On growth, while the commentary is bullish, the RBI’s real GDP projection for FY22 at 10.5 per cent is lower than the Economic Survey’s 11 per cent. The RBI has walked the talk on continuation of easy liquidity by expanding its on-tap targeted repo scheme from banks to NBFCs, extending the relaxation on marginal standing facility, putting off capital conservation buffers for banks and even announcing a Cash Reserve Ratio (CRR) concession for lending to new MSME borrowers. Restoration of CRR from 3 to 4 per cent, the only measure that clamps down on liquidity, is expected to be compensated by open market operations. Given that the bond market has been fretting over the Centre’s elevated deficits and mega market borrowings since the Budget, it is strange that neither the MPC nor the Governor’s statement cites this as a risk to the low-rate regime. But reading between the lines, the RBI’s assurance that it would ‘ensure’ orderly completion of government borrowings, suggests that it will continue with its unconventional interventions to keep yields under check. While such interventions may work in the short run, it is moot if they can be kept up if market forces consistently exert countervailing pressure. In this context, facilitating direct retail participation in the G-sec market may turn out a win-win for both the government and savers who lack long-term fixed return avenues. But for this, retail investors must be allowed access to gilts through their current demat accounts via securities market intermediaries, instead of a separate dispensation for the money markets.

Given that the RBI has kept its spigots of liquidity wide open since March, there are concerns that sustaining these policies for too long can lead to moral hazard on lending. It may, therefore, be prudent for the RBI and the MPC to begin discussing the macro triggers and timeline that would lead to a gradual wind-down of this stance, while communicating this clearly to markets.

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