RBI comforts the markets

RBI Governor Shaktikanta Das (file image)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its latest policy statement on October 8, went against market expectations of a tapering of interest rates and unanimously voted to maintain the status quo on rates and an accommodative policy stance.

A large number of forecasters had expected RBI to hike the reverse repo rate to signal a change in the policy stance and end quantitative easing.

The MPC not only addressed the speculations of widening fissures within the Committee, which started after the last meeting where one member dissented with the status quo stance, it also made clear that putting the economy firmly back on a faster growth path remains the top priority.

Growth forecast maintained

After many months, the RBI governor sounded confident and not worried. In a post, the Governor asserted that the economy is on course to full recovery from the shocks of pandemic and achieve even faster growth. He cited resilient rural demand; improving capacity utilization in industries; reviving business and consumer confidence and tax buoyancy to support his argument.

The governor noted that “output is still below pre-pandemic level and the recovery remains uneven and dependent upon continued policy support”. The RBI maintained its 9.5% real Gross Domestic Product (GDP) growth target for the financial year 2022.

Inflation assumed transitory

The governor reiterated the RBI’s view that inflation is “transitory”. He said that “supply side and cost push pressures are impinging upon inflation and these are expected to ameliorate he ongoing normalisation of the supply chains”. Thu

Thus, the RBI can continue with its accommodative policy without being concerned about falling behind the curve. Nonetheless, Shaktikanta Das expressed the need to keep a close vigil on the energy inflation in global markets.

Echoing popular sentiment, he also called upon the government to calibrate indirect taxes on fuel to anchor the inflationary expectations. The RBI now projects average consumer inflation for FY22 at 5.1%, closer to the upper bound of its tolerance band of 2% to 6%.

Reference to unsustainable asset & stock prices dropped

In recent months the RBI had shown tolerance for higher rates and slightly weaker rupee. The governor had also expressed concerns about the stock market running ahead of fundamentals. In a slight change of stance, the governor made no mention of rising asset and stock prices this time, showing tolerance for higher asset and stock prices.

No plan to rock the boat

The governor noted that the measures initiated by the RBI to maintain adequate liquidity in the financial system, and keep bond yields stable in view of the higher government borrowing program, have been mostly successful until now. He reiterated that adequate liquidity support would continue. He promised that “The Reserve Bank, would remain in readiness to undertake G-SAP as and when warranted by liquidity conditions and also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs).”

The governor categorically stated that the RBI will be patient in its policy function and would do nothing to rock the boat.

The policy statement should comfort the markets because it effectively puts all the chances of a negative surprise from RBI at rest.