October 17, 2021 - 11:59 am

Unchanging In Interest Rate

The RBI last week decided to maintain accommodative stance and in its interest rate at 4%, reverse repo rate at 3.35 % and MSF and bank rate at 4.25% even as the economy is showing signs of recovery after the second covid wave. This is the eight time in a row that the Monetary Policy Committee (MPC) has maintained status quo. The MPC retained its forecast for GDP growth at 9.5 % for the current financial year and also projected a strong growth of 7.8 % for the next financial year (2022-23). The MPC slashed its inflation forecast significantly from 5.7 % to 5.3 % for the current financial year.

                    The IMF-RBI growth outlook match reinforce the recovery optimism that has been gaining ground in India of late. The correspondence extends to the inflation outlook, albeit with differing projections, but simple directional incline, that is, downwards. The central bank announced a halt to its Government Securities Acquisition Program (GSAP) or fresh liquidity infusions, reassuring at the same time that the stop did not represent a steep liquidity reduction. A set of changes and additions were also introduced to manage liquidity with increased discretion in the roadmap. Global anxieties over inflation escalated in the weeks leading up to review even as beliefs about its transistorizes remain intact; however fears over rising natural gas other energy prices have fanned the specter of broader price increases, and bond yields have risen across the advanced economies.

                                                 At the same time, however, it is clear that monetary policy is fast reaching a watershed after which interest rates will start going up. If excess liquidity is not soaked up in the system, it can only lead to asset price bubbles - such as high property prices. According to the RBI, even as the domestic economy is showing signs of mending, the external environment is turning more uncertain and challenging, with headwinds from slowing truth. In some major Asian and advanced economies, a steep jump in natural gas prices in the recent weeks, and concerns emanating from normalizations of monetary policy in some major advanced economies. The smooth sale in forthcoming time will be interesting to watch.