RBI says economy going in only one direction: Up

NEW DELHI: The Reserve Bank of India’s Monetary Policy Committee repeated the Union Budget’s optimistic forecast about the economy’s growth prospects in 2021-22, reiterated the need for continued policy support, and was sanguine about the inflationary outlook — all messages that highlight the Indian economy’s sharp recovery from the impact of the ongoing (but slowing) Covid-19 pandemic.

In sync with the Budget’s assessment of the economy going forward, MPC has projected a gross domestic product (GDP) growth rate of 10.5% in the fiscal year 2021-22. MPC’s decision to keep interest rates unchanged while retaining an accommodative policy stance also suggests that while having passed the baton of economic revival to fiscal policy from interest rates, the central bank will continue to support this process by maintaining liquidity.

Over the past year, MPC cut the policy rate by 115 basis points — one basis point is one hundredth of a percentage point — from February 2020 to 4% it is at now, and infused a total liquidity of ₹9.37 lakh crore (since March 2020) into an economy roiled by Covid-19 and the lockdown imposed to slow its spread. To be sure, the net excess liquidity in the system, captured by banks parking their excess cash with the RBI, could be ₹6.5-7 lakh crore. The economy contracted by 24% in the three months ended June 30 and 7.5% in the three months ended September 30, but has recovered since, with many high-frequency indicators in the green. “While the year 2020 tested our capabilities and endurance, 2021 is setting the stage for a new economic era in the course of our history,” RBI governor Shaktikanta Das said in his press conference after the MPC meeting. “I would like to say that, going forward, the Indian economy is poised to move in only one direction and that is upwards,” Das said while concluding his statement.

While the formal sector of the economy seems to be on a strong recovery path, consumer sentiment, as seen in RBI’s Consumer Confidence Survey (CCS), has not shown a concomitant recovery, although it has shown sequential improvement over the past two rounds conducted in November 2020 and January 2021. The latter is likely to be a result of continuing weakness in labour markets and the informal sector.

The inference is that MPC may fear that the ongoing economic recovery might be jeopardised by a sudden withdrawal of accommodative monetary policy.