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MPC actions suggest RBI's 'easy regime' reaching its limit: Crisil

The MPC, on August 6, retained the key lending rate (repo) at four percent and continued with the accommodative stance. It, however, increased the retail inflation forecast to 5.7 percent for the fiscal year 2022.

August 13, 2021 / 02:30 PM IST
Reserve Bank of India

Reserve Bank of India

The latest policy actions of the monetary policy committee (MPC) suggests that the 'easy regime' or 'the accommodative stance' of the Reserve Bank of India (RBI) is reaching its limit, said rating agency Crisil, the Indian subsidiary of global rating agency, Standard and Poor's, on August 13.

"The Reserve Bank of India (RBI), too, has been tolerant of inflation, with its Monetary Policy Committee (MPC) staying accommodative to support growth. But the easy regime appears to be reaching its limit. The latest MPC actions signal so," said the rating agency said.

The MPC, on August 6, retained the key lending rate (repo) at four per cent and continued with the accommodative stance. It however, increased the retail inflation forecast to 5.7 percent for the fiscal year 2022.

MPC’s accommodative stance indicates the monetary policy’s willingness to either cut rates or stay on hold while a rate hike is ruled out. The RBI hiked the CPI inflation estimate for the fiscal year 2022 to 5.7 percent from 5.1 percent earlier.

“All signs point to the beginning of the end of easy money policies across the globe. The only question for the Reserve Bank of India (RBI) is of timing,” said Crisil in a report released on August 13.


Crisil expects the RBI to make a more definitive statement by this fiscal end, and raise rates by around 25 basis points (bps). “While inflation will be the key driver of this decision, other factors such as the strength of recovery (mainly domestic demand) and policy normalisation by other major central banks will also matter,” the rating agency added.

On August 12, official data showed that the Consumer Price Index-Based inflation (CPI) for July fell to 5.59 percent from 6.26 percent in June, back within the Monetary Policy Committee's inflation target range of 2 percent to 6 percent, as easing food prices helped.

In May, the CPI inflation was 6.30 percent. In the August 6 monetary policy statement, the MPC had said that its current assessment shows “the inflationary pressures during Q1:2021-22 are largely driven by adverse supply shocks which are expected to be transitory.” In that sense, the July inflation print shows the MPC assessment in the predicted path.

Crisil said the RBI has been tolerant of inflation and has stayed accommodative to support growth given the deep hit suffered by the economy. “But it appears to be reaching the end of tether as inflation naggingly ascends. If this pressure continues and systemically important central banks, especially the Fed, begins normalising, the RBI will start to roll back accommodation,” said Crisil.

RBI taking baby steps to exit

Economic recovery, which is expected to gain momentum in the second half of this fiscal, will further reduce the need for extremely accommodative policy, Crisil said.

“For now, the RBI is taking baby steps towards the exit. We expect this calibrated withdrawal of liquidity to continue and gain pace as more certain signs of economic recovery become visible,” the report said.

“But that is predicated on growth staying on track. We expect a two-stage signaling by end of this fiscal: a change in stance from accommodative to neutral, followed by a hike in the repo rate by 25 bps to 4.25%,” the rating agency said.

In his address, the RBI Governor Shkatikanta Das argued that recent inflation spike is transitory. “The available data point to exogenous and largely temporary supply shocks driving the inflation process, validating the MPC’s decision to look through it,” Das said.

“The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy. A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions,” Das said.
Moneycontrol News
Tags: #MPC
first published: Aug 13, 2021 02:21 pm

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