RBI on track to policy normalisation

K Srinivasa Rao | Updated on October 11, 2021

While supporting growth, the RBI has indicated that normalisation will be transparent and non-disruptive

The spirit of monetary policy review clearly reinforces its priority for growth while maintaining transparency of its gateway to normalisation. It maintained status quo in interest rates that was last changed on May 22, 2020. The monetary policy stance, too, shall remain accommodative as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy.

The repo rate of 4 per cent and reverse repo rate at 3.35 per cent continued despite some market apprehensions that the RBI may raise the reverse repo rate, marking a more conspicuous move to begin unwinding the easy money policy. But it did not happen.

Market participants know that it is inevitable to move towards normalisation of monetary policy measures at some future point of time. The RBI is keeping its pace and modulation transparent by sharing information. Due to the pandemic, the 65 basis points (bps) difference created between the repo and reverse repo rates to dissuade banks from parking funds with the RBI will have to be restored back to 25 bps of difference prevailing at the pre-pandemic stage.

Similarly, the excess liquidity working out to ₹13 trillion now will have to be absorbed. The cut off of 3.99 per cent in its auction of variable reverse repo rate (VRRR) is an ample indication. Spike in bond yields by three basis points following the monetary policy announcement reflects the pulse.

Emerging trends

The high frequency indicators show the revival of consumer demand including in hinterland. The festival season is expected to push up the sentiments further to consolidate the revival process.

The engines of growth are picking up pace with GST and toll collections going up. Continued resilience of the agriculture sector and record production of kharif foodgrains in 2021-22, can not only boost growth but can also soften the inflation trajectory.

Similarly, the increasing capacity utilisation in manufacturing sector, exports breaching the $30 billion mark for the seventh consecutive month in September 2021 are well poised to reach the export target of $400 billion during 2021-22. Revival of contact intensive sectors was the last to join the growth momentum, but is still at a nascent stage.

These growth trends can create a congenial ecosystem to boost near-term growth and can also revive the much-awaited virtuous investment cycle.

Keeping these emerging positive trends and the fact that Q1 growth of FY22 at 20.1 per cent was almost in line with Monetary Policy Committee (MPC) projection at 21.4 per cent, the RBI retained its GDP outlook at 9.5 per cent for the current fiscal. But still it is watchful about CPI headline inflation and is projected to stay at 5.3 per cent during FY22, brought down from 5.7 per cent projected earlier.

Inflation is expected to further moderate to 5.2 per cent in Q1 of FY23. With CPI inflation during July-August turning out to be lower than anticipated, the belief of RBI that inflation is a transitory phenomenon is proving right.

In a bid to prioritise growth, tolerance of inflation, edged towards the upper end of the glide path, may be necessary. The equation of growth and inflation is to be differently viewed when the economy is fighting against the worst kind of pandemic. With external sector volatility and persisting risks of pandemic, the RBI is ready to act as and when necessary to support the ailing sectors.

New policy measures

Considering the current macroeconomic state, the time line of availability of on tap ‘Special long-term repo operations’ (SLTRO) of ₹10,000 crore to Small Finance Banks (SFMs) is now extended till December 2021. Loans extended by banks to NBFCs for on-lending to underserved and un-served community will continue to be classified as priority sector lending till March 31, 2022.

The RBI continued its digital payment thrust by increasing the transaction limit in IMPS from ₹2 lakh to ₹5 lakh, geo-tagging of payment system touch points, and introduction of retail digital payment solutions on offline mode. With increasing role and penetration of NBFCs, it is necessary to protect consumer interest. Therefore, the RBI introduced the internal ombudsman scheme (IOS) for certain categories of NBFCs having higher customer interface.

The central bank is therefore convinced that there is no need for hasty retreat until the adversities of Covid-19 are convincingly neutralised with the intensified vaccination programme. With monetary policy measures working their intended way, adequate recoupment time is to be allowed to unleash full potentiality.

The pace, timing and synchronisation of normalisation measures are always debatable, but the RBI is clear in its approach that it will be gradual, calibrated and non-disruptive.

The RBI keeps sharing every development to prepare the markets to work towards growth while keeping the likely impact of normalisation process. Since the beginning of FY22, the RBI has been signalling its intent to prepare the economy to adopt transition to normalisation.

Considering the well-calibrated and transparent approach of the RBI, all stakeholders should join in the journey adjusting their internal moves to speed up recovery on a sustainable mode. With the ‘bad bank’ finally arriving and the current edition of emergency credit line guarantee scheme (ECLGS) enhanced to ₹4.5 trillion with relaxations for banks to lend, it’s time for banks to plunge into action with renewed commitment.

The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are personal

Published on October 11, 2021

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