RBI walks judiciously


By pressing the pause button on interest rates, the Reserve Bank of India has done the right thing, given the rising inflation which is hovering over 6% and the uncertainty surrounding the coronavirus pandemic. The Monetary Policy Committee (MPC) chose to maintain the status quo by keeping the repo rate unchanged at 4% and took the accommodative stance. With inflation expected to go up further, the central bank has limited options to support growth and it is for the government to be prepared to step in with fiscal measures to revive the economy. The prospect of economic recovery has remained fragile because of a surge in Covid-19 cases and frequent lockdowns. In the last two policy meetings in March and May, the RBI reduced the repo rate twice by a total of 115 basis points. Since the central bank is near the end of the current rate-cutting cycle, the elbow room for further rate cuts is limited. It is expected that there might be greater clarity on both growth and inflation by the time the MPC holds its next meeting in October. Though economic activity started to recover from the lows of April-May, the spike in Covid-19 infections had forced re-imposition of lockdowns in several cities and States. This has further fuelled inflation pressures. The average consumer price index (CPI)-based inflation was over 6% for the two consecutive quarters while the MPC’s mandate is to maintain inflation at 4% and the central bank is answerable to Parliament if it misses the inflation target for three consecutive quarters.

In an environment of unprecedented stress, supporting recovery of the economy gets top priority in the conduct of monetary policy. Any available space for further rate cuts must be used judiciously to maximise the beneficial effects for underlying economic activity. The next rate cut can be expected only after inflation gets back to 4% level. A more protracted spread of the pandemic is one of the key downside risks to growth while the supply chain disruptions continue to persist, impacting both food and non-food items. The RBI has refrained from predicting growth in the last two policies, citing uncertainties due to the pandemic. During the May policy review, it had said the economic growth is estimated to be in the negative territory for 2020-21, with some pick-up in growth impulses from the second half of the fiscal. The RBI has sought to address the issue of loan restructuring in the best possible way in view of the present limitations. A new resolution framework for Covid-19-related stress facility has been extended to large corporate, small and medium enterprises and personal loans with necessary safeguards in each segment.

Now you can get handpicked stories from Telangana Today on Telegram everyday. Click the link to subscribe.

Click to follow Telangana Today Facebook page and Twitter .