RBI does well to focus on growth; it may wait till February to act on rates


The RBI has done a commendable job in maintaining policy rates and taking an accommodative stance. They are looking out for the right time to avoid market disruptions.

India is also taking a different approach when it comes to the issue of rates. While the countries like the US, are looking for a faster normalization taking speedy decisions.

In India, the RBI is taking a dovish stance and gives no hint for rate hikes.

But that doesn’t mean that there is no help from the RBI. The nation has all the support it can get for its recovery.

The GDP grew y-o-y 8.4% in Q2FY22 and key sectors like construction grew at 7.5% y-o-y. But these numbers do not show that private consumption is smaller than it was in Q2FY20. Even the hike is only a slight one, as the former rate was 7.2%.

Also, the informal economy is fragile. The terms of trade are unfavourable making the good farm output not able to reach its potential.

Another matter of concern is the relatively wide output gap, which according to the RBI will not close soon.

The slack in the labour market, especially that of the urban market, shows the weakness of the economy.

Just when everything seems to be on the trackback to normal, Omicron came in, raising concerns throughout the economies. In this time of uncertainty, a switch to neutrality in the monetary policy would slow down the economy.

The loan growth is at a modest level of 7%. If the rates are left lower for a little more time, it would boost the demand for credit, which leads to growth.

It seems that RBI is downplaying the inflation, treating it as a transitory and forecasted that FY22 immaculate at 5.3% when inflationary tensions flourish. But that doesn’t mean that RBI has avoided it, as the Governor has expressed his concerns.

RBI seems to be taking comfort from the fact that of falling crude oil prices, the lowering taxes over fuel and resulting fall in vegetable prices. These would control inflation for some time. But the prices are still high across many products.

Then there is the supply chain crisis. To adjust the high input price, the manufacturers would put it over the consumers thus increasing the price.

RBI’s forecast might be below consensus and might go beyond that, but have correctly predicted the easing at FY23.

The RBI has not neglected the surplus liquidity. For that, they will move away from reverse repo rate to repo rates by rebalancing liquidity to variable reverse rate repo. The bigger quantities of the surplus will be taken in by the VRRR.

In this condition, RBI would wait till February to take a decision over the rates, based on the domestic and international conditions.

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