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Analysis | RBI policy: No rate action likely, but watch out for FY22 GDP growth estimate

The concerns raised by the MPC in the last policy review on the growth-front remain broadly the same. Hence, a rate action is unlikely.

June 02, 2021 / 07:37 PM IST
Shaktikanta Das

Shaktikanta Das

The Monetary policy committee (MPC), which is the rate setting panel, has begun its three-day policy review on 2 June. The panel will announce it’s decision on Friday (June 4). Will the MPC go for a surprise announcement or stick to status quo in rates? The consensus among economists is that the central bank will retain its key rates in the face of the continuing uncertainty in the pandemic-hit economy. The trend on both the inflation and growth--the two key variables for policy formulation--largely remain the same as at the time of last policy review.

Although the MPC looks at an inflation band of 2-6 per cent, it looks at a mid-point of 4 per cent as the ideal target. Inflation based on retail prices remain above this medium term target of 4 per cent for quite a long time now. In April, the CPI inflation came at 4.29 per cent compared with 5.52 percent in the March backed by fall in food prices. This is the fifth consecutive month that CPI inflation is within the MPC's target range. On March 31, the Centre gave the MPC an unchanged inflation target for 2021-22 to 2025-26. If the pandemic-induced lockdowns stay longer than expected, there is a likelihood of prices pressure escalating further putting pressure on the CPI print. A lot will depend on how the monsoon distribution as well.

Perhaps, more than the rate action, the central bank’s outlook on growth will be important to watch. The Gross Domestic Product (GDP) contracted 7.3 per cent in FY21. In the last policy review, the MPC had retained the GDP growth forecast for FY 22 at 10.5 percent. Given that many states are back to complete or partial lockdowns and there are fresh concerns on growth recovery, will the central bank tweak its GDP growth forecast? SBI economists has sharply cut their FY22 GDP growth estimates to 7.9 per cent from 10.4 per cent earlier. Will the MPC too cut the growth projection?

In the last policy review, the RBI had clearly sounded cautious on the evolving growth situation saying lockdowns could hamper growth recovery. “The renewed jump in COVID-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy,” the RBI policy said. “In such an environment, continued policy support remains necessary,” it added.

Later, in the minutes of the policy meeting too, the MPC members had expressed their worry on the impact of Covid on growth. To give an example, Mridul K Saggar, one of the MPC members, said the economic recovery can come under risk if the new wave of infections is not flattened soon. “This is especially so as monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital, though expansion of policy toolkits can still afford additional comfort,” Saggar said.

Further, learning effects on calibrating stringency of restrictions may keep economic costs of the second wave much lower than the first but still retard full normalisation by a quarter or two, Saggar pointed out.

“Ramping up vaccination, testing and treatment holds the key to protecting economic recovery and health policies have become the first line of defence. Monetary and fiscal policies can only play a second fiddle,” Saggar noted.

The RBI may reiterate its willingness to ensure smooth liquidity availability in the system and its willingness to do whatever necessary to safeguard growth recovery. The central bank has already made a slew of announcements in the wake of Covid second wave, including a special liquidity facility to ramp up Covid health infrastructure and a provision for restructuring for smaller companies. Banks have demanded a moratorium for a quarter or so. The RBI may come with more announcements in this context in the near future, if not on the policy day.

On the monetary policy-front, the concerns raised by the MPC members in the last policy review on economic growth recovery remain largely the same. Vaccination progress is yet to pick up in the desired manner. Also, the statewide lockdowns have begun impacting the business momentum on the ground,  which has reflected in drop in digital payments in April and May as this Moneycontrol story highlights. Given this backdrop, the MPC will likely stay on a prolonged pause and continue with its accommodative stance.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
first published: Jun 2, 2021 07:37 pm