Get App
Last Updated : Feb 06, 2020 04:34 PM IST | Source:

RBI Monetary Policy: Shaktikanta Das & Co caught between a rock and a hard place

There is no surprise in this decision and that’s what the markets expected too.

The Reserve Bank of India (RBI) had to send a signal that it is on the side of the growth-lobby.But, on the other side, inflation threat is looming above its comfort level.A growth supportive policy requires slashing rates. And if you want to check inflation,policy rates must harden. The danger is any rate action either side could damage the growth-inflation dynamics. What does the central bank do? The RBI safely chose the middle-path. It didn’t do anything on rates for now, but said that the policy stance remains ‘accommodative’.

“The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” the RBI said announcing the rate decision.

There is no surprise in this decision and that’s what the bond market expected too. Markets didn’t move much. The rupee traded flat and bond yields remained in a range.The benchmark 10-yr yield fell to 6.47% from 6.51 percent. RBI’s pro-growth comments have kept the hopes of a rate cut, may be later this year, alive in the markets. “The MPC recognises that there is policy space available for future action,” the RBI statement said.

Follow RBI Monetary Policy LIVE updates here

The overall tone in the policy suggests that the RBI is clearly worried about the growth situation. “Economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner,” it said.

On the other hand, the inflation worries are looming. Retail inflation, in December, touched a 65-month high of 7.35 percent in December rising above the comfort level of the central bank.

The RBI seems to have given a thumbs up the Union budget saying the measures announced  will provide an impetus to growth. It thinks the budget emphasis on boosting the rural economy and infrastructure should help the growth momentum in the near-term, the corporate tax rate cuts of September 2019 should help boost the growth potential over the medium-term.

But, what the policy doesn’t say is that as a percentage of the GDP, the total budget  expenditure is just 0.3 percent higher than last year. The government pegged total expenditure for FY21 at Rs 30.42 lakh crore or 13.5 percent of GDP compared with a total expenditure of Rs 26.99 lakh crore (revised estimate) or 13.2 percent of GDP in FY20. That’s just 0.3 percent increase over year.

The growth for FY21 is projected at 6 percent, and for the current year at 5 percent. It expects retail inflation to stay elevated in the near term and ease later assuming a good monsoon.

Also Read RBI Monetary Policy: FY21 GDP growth projected at 6%

The RBI’s promise of future rate cuts is purely based on its assumption that the inflation will ease going ahead. But much will depend on a good monsoon. If these assumptions go wrong and inflation stays high, the central bank will be forced to be on hold mode for a long time.

The message from the policy is clear. The RBI wants to join the government in supporting the economic growth. Just that, high inflation doesn’t permit it do so. The RBI is caught between a rock and a hard place.

Also Read: RBI Monetary Policy key takeaways

Moneycontrol Ready Reckoner
Now that payment deadlines have been relaxed due to COVID-19, the Moneycontrol Ready Reckoner will help keep your date with insurance premiums, tax-saving investments and EMIs, among others.
Get best insights into Options Trading. Join the webinar by Mr. Vishal B Malkan on May 28 only on Moneycontrol. Register Now!

First Published on Feb 6, 2020 01:24 pm
Follow us on