Ever since COVID-19 hit, the central bank’s message has been clear —the focus is on reviving growth first and foremost.
By Shanti Ekambaram
Status Quo – yes. When the Monetary Policy Committee (MPC) meets for the third bi-monthly policy of FY2021-22, I expect the MPC will keep key policy rates unchanged. Ever since COVID-19 hit, the central bank’s message has been clear —the focus is on reviving growth first and foremost. It has maintained a low rates-easy money policy to stimulate consumption, investment and propel economic growth. As it seeks to navigate the economy towards a more sustained pace of growth, the MPC will keep a close watch on key macroeconomic indicators and high-frequency data, in addition to the possibility of a third wave.
The US Federal Reserve has indicated that there will be no immediate change in its monetary policy stance despite higher inflation levels, as it believes that inflation is transitory and that the US economy needs further support to grow.
Domestic economy: Inflation, monsoon, growth
In India, the RBI has followed almost a similar path. Liquidity is abundant with easy money supply conditions, and rates have been kept low, supported by an accommodative policy stance. The key question in India as well is on inflation. For the second month in a row, CPI Inflation came in at above 6%. Led by supply constraints rather than demand-side factors, retail inflation was recorded at 6.26% in June, moderating marginally from 6.30% of May, but well above the MPC’s threshold level.
The RBI also believes that inflation is transitory and is expected to trend downwards during the course of this fiscal. This gives it the much-needed space to continue to focus on supporting and stimulating growth for the time being.As every year, the progress of the monsoon season plays a significant role in India’s economic decision making. The season has been normal so far and this will have a positive impact on food inflation and the rural economy.The fiscal began with a muted April and May on consumption, growth and demand for credit due to Covid 2.0. The second half of June saw a good recovery going by high-frequency data and July was better. Worries of a third wave is keeping discretionary spending relatively slower and thus a V-shaped recovery like last year is not yet evident. In the banking system, deposit growth continues to be higher than credit growth.
Thus, the biggest question that will concern the MPC is the sustainability of economic growth. In its June policy, the RBI projected the real GDP growth at 9.5% in 2021-22. The MPC may retain its GDP projection in the August policy. It will be important to see if it changes the inflation projections and the commentary around that. While economic activity continues to recover from the lows of April and May, it is important that there is a sustained pick-up in growth.
Watch out for signals from the MPC
I expect that the MPC will maintain a status quo in this policy on both fronts – rates and its stance. What will be important to gauge this time around is the tone and tenor of its discussions that will hold cues for future action.And hence, while this will be a no-action policy, it is these signals that could give us an indication on the path forward. Inflation is likely to be above the earlier estimates put out and thus the MPC’s narrative on this will be important. Suffice to say the tightrope walk between price stability and economic growth will continue. While data – both global and local trends – will be watched closely, I do not expect any change in stance till December at least, if not till the end of the fiscal.In conclusion, the global economy, domestic inflation and the pace of economic growth will likely keep a status quo on rates with an accommodative stance.
(The author is group president –consumer banking, Kotak Mahindra Bank)