Announcing the first monetary policy of fiscal 2022, the central bank left the key policy rate unchanged at 4 per cent for the fifth time in a row, after the rash of rate cuts earlier last fiscal.
It also assured of an indefinitely long period of accommodative policy stance which was topped by a historic move to commit its own balance sheet to the market with a new liquidity tool called ‘the secondary market government securities acquisition programme’ or G-Sap, under which it will buy government bonds worth Rs 1 lakh crore this quarter.
Addressing the media online, Governor Shaktikanta Das said “as of now growth is of paramount importance…and we’ll do whatever it takes to help sustain the recovery.”
But he was quick to add that “inflation targeting is also important.”
“More importantly, the government reiterating the plus-minus 2 per cent of 4 per cent inflation targeting gives us enough policy space to support growth as there are more downside risks to growth on the horizon now than in recent past which make growth…of paramount importance,” he added.
The central bank chose to retain its last forecast of 10.5 per cent GDP growth this fiscal, saying it is “too early to revise its own forecast done two months ago as we have just entered the new fiscal year.”
Asked why the thrust was on growth despite pencilling in an upward inflation trajectory (5.2 per cent for the first half and 4.4 per cent for the second), and offering an indefinite period of accommodative policy stance, Das said, “We’ll continue to be accommodative till growth becomes sustainable and we will do whatever it takes to achieve that.”
Das continued to explain that “inflation is already in a well-entrenched and well-anchored framework now and so is inflation expectation, that’s also well-anchored. This is very clear from the fact that the government notification has reiterated the plus-minus 2 per cent of 4 per cent inflation targeting.”
“This framework gives RBI enough leeway gives enough policy tools to manage any extraordinary situations like the current pandemic.
“For the time being and at the current juncture, growth is of paramount importance, while of course keeping in mind inflation targeting is also important. After all, the the primary goal of the monetary policy is to maintain a certain level of inflation,” he said.
However, the governor was quick to admit that the inflation outlook is uncertain.
On when the RBI will begin to exit the low reverse repo regime, Das said “that’s something only time can decide. All I can tell you now is that we are accommodative and will remain so till we feel it is needed. So, we will have to wait when we will exit reverse repo.”
His deputy Michael D Patra chipped in saying whenever the reverse repo is in operation, the policy is accommodative, parrying a direct response to a query on the impact of such high liquidity infusion on inflation.
On whether the RBI is anticipating some shocks to the system, Patra said, “We are mindful of the liquidity situation. And we will be mindful of taking a balanced action.”
“To begin with, for the first in history, RBI is committing its balance sheet to the monetary policy under which we are committing to the market that we will give you Rs 1 trillion each quarter (up to Rs 3 trillion this fiscal), whether you want it or not, and irrespective of the market movement we will give you that amount of liquidity through the G-Sap,” he said.
He went on to explain that when the policy rates are left unchanged, other tools are required to run the policy.
Patra said the bond buying is “an upfront assurance and is similar to what other major central banks are doing in buying the best and most secure assets, that is G-secs — the benchmark for the entire money market.”
“We are not leaving anything to the market to guess on the quantum, the timing or the demand or anything else. And this is a commitment to fund it from the RBI balance sheet itself,” Patra said.
On maintaining the GDP forecast at the previous level of 10.5 per cent (26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4), Das said, “It is too early to give a guidance especially now the pandemic situation has become more uncertain due to the recent surge in infections. Also, we are at the beginning of a the new fiscal year.”
“But at the same time I would like to like to say that the current situation is unlikely to impact the economy so much as it did this time last year because lockdowns are very selective this time. Also, many establishments, manufacturing units and businesses are fully operational and are better prepared to face the challenges now. And so are the general public.
“Therefore, we’ve reiterated our 10.5 percent forecast as the situation prevails today; and I don’t think there is any significant upside risks to this as of now. Vaccine is an additional factor on the table which was not there last year. Overall we are better prepared.
“So whatever guidance we’ve given so far looks reasonable. Going forward we will be watchful, Das noted.