In line with market expectations, the RBI has kept the policy rates steady. But the differentiator has been the display of optimism, which can potentially propel the market sentiments to boost growth. It turned the tables with its right tab on high frequency indicators while keeping the rest intact.

Keeping the stance of the policy ‘accommodative’, it went beyond its earlier assurance to extend support until the impact of Covid is mitigated. This combines into a medium term assurance that can potentially add a tinge of comfort to the market players.

It defused the fear of inflation by reinforcing that it should be transitory with OPEC agreeing to raise oil production to pre-pandemic level by September 2022 that can soften the spot and future crude prices from its peak in early July.

Crude price is a key factor that propelled inflation in many economies, even leading to policy rate rise in some countries. In the near term, it hinted at moderation of indirect tax component of pump prices by the Centre and States

Faster revival

Diving deep into the early growth trends, the RBI expects that post the second wave of Covid, the revival is faster than earlier, reflecting sustained adaptations to Covid-related protocols and easing of containment forming a formidable pathway for growth.

Though the high frequency indicators have dipped during May and June due to local lockdowns and closure of business units, their revival in July has been indicative of their forceful comeback.

Noticeable is the resurgence of rural demand. The manufacturing purchasing managers’ index (PMI) that had dropped to 48.1 in June for the first time in 11 months, rebounded well into expansion zone with a reading of 55.3 in July.

Even the Services PMI recovered to 45.4 in July from 41.2 in June 2021 showing widening bandwidth of growth. The first quarter results this fiscal of non-financial corporates and leading banks, more importantly SBI, have shown better profitability, indicating early signs of buoyancy.

The rate of headline inflation is slowing down and can further taper with fuel and food inflation calming with receding supply-side disruptions. Taking cue from positive developments, the CPI inflation for FY22 is projected upwards from its earlier estimate of 5.2 per cent to 5.7 per cent but is expected to stay within its upper end of the comfort level of 6 per cent.

With pent-up demand set to acquire a durable character with accelerated pace of vaccinations, the buoyancy in exports, pick-up in government expenditure, including capital expenditure, and the recent economic package reaching the target group, a well-founded revival is in the offing.

Assurance to banks

In order to pump prime these growth nodes and continuing its liquidity support, the RBI has extended the duration of (i) on-tap TLTRO and (ii) relaxation in marginal standing facility (MSF) till December 2021.

It also extended the deadline for achievement of financial parameters under Resolution Framework 1.0 to October 1, 2022. These postponement of timelines will provide assurance to the banks.

The RBI has affirmed its positive outlook to keep the GDP estimate of FY22 at 9.5 per cent despite some global think tanks changing their outlook based on the temporary disruptions caused by second wave.

The RBI has made it clear that its priority is to ensure restoration of growth. Banks, now on a stronger footing, should come forward to use the policy relaxations/extensions by accelerating credit flow.

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

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