RBI has been pragmatic on growth; ring-fenced the liquidity issue

The Monetary Policy Committee (MPC) decision on rates was quite expected and hence the status quo was not a surprise for the market. The same holds for the accommodative stance, which means that growth will remain the main objective, as the MPC has stated that this stance will hold until growth prospects stabilise.

The focus was to be more on the language of the RBI on growth and inflation. Here, the RBI has been pragmatic on growth with a forecast of 10.5 per cent for fiscal 2021-22 (FY22), which is quite timely. The International Monetary Fund (IMF) had just spoken of 12.5 per cent growth, which looks less likely given the recent developments taking place. However, the RBI has spoken very positively on the growth situation based on the high frequency indicators available, which is open to debate given the series of lockdowns we have had in various states. The RBI has a lot of confidence that the measures invoked by the government last year will bear fruit this year, which is encouraging.

On inflation, the central bank has talked of CPI being above 5 per cent till September and the rationale is assuring. The kharif crop and movement of international commodity prices will have a bearing on the progress of prices. The RBI has again suggested that the government does something on fuel taxes, as this has potential to lower not just the primary effect, but also the secondary impact on inflation of other goods that got affected due to transport costs going up.

Admittedly, these inflation numbers are getting support from the base effects as last year it was high for the first three quarters. Therefore, numbers of 5.2 per cent in Q1 and Q2 should be interpreted against this background. The expectation is inflation will come down to 4.4 per cent in Q3 presumably on the back of a good crop. The assumption is that there will be no onion or tomato-price shock this time!

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The RBI has done a mammoth operation of managing liquidity last year, not just for government borrowing, but also the corporate bond market through the targeted long-term refinance options (TLTROs) and other facilities. This will continue in FY22 too.

There are however, two interesting new measures to be taken at managing liquidity. The first is drawing down liquidity in the system, which cannot be put to use through the variable rate reverse repo (V3R) for different maturities. Depending on the quantum and persistence of surplus liquidity in the system, these reverse repo operations would be undertaken. To speak clearly to the market, the RBI has said that this measure is no way a signal for tightening policy as was interpreted last time. Such blunt talk is helpful.

The other is the GSAP – Government security secondary market acquisition programme. This will be a planned open market operation (OMO) kind of action, where the first has been announced for Rs 25,000 crore for April 15. Clearly, the RBI is ring fencing the liquidity issue on both sides – being either surplus or deficit – given the large borrowing of the government. It has been stated that this will keep the yield curve stable and free from volatility. Therefore, two objectives will be met at one stroke.

The RBI has set the tone for the year and we can expect more of these GSAP measures and maybe even TLTROs when the need arises. So, it will be again liquidity management while keeping an eye on inflation and growth all the time.

(Madan Sabnavis is chief economist at CARE Ratings and author of: Hits & Misses: The Indian Banking Story. Views are personal)

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