The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) voted to maintain the status quo in its December meeting, as expected. The committee decided to keep the benchmark policy repo rate at 4% and to keep its accommodative stance “as long as necessary” to boost growth. Because of the uncertainty surrounding the new Covid variant, the tone of the statement was cautious and more dovish than expected. However, the statement’s central message remains the same: as long as inflation remains under control, “continued policy support is warranted,” given “the slack in the economy,” and the fact that parts of the economy, particularly private consumption, are below pre-pandemic levels, “continued policy support is warranted.”
The MPC believes that economic activity is picking up steam, noting that “recovery in domestic economic activity is becoming increasingly broad-based.” The central bank’s growth forecast for this year has been kept at 9.5 percent. However, because growth in the second quarter was slightly higher than expected, possibly due to pent-up demand, it has lowered its second-half growth forecast. The forecast for the third and fourth quarters has been reduced to 6.6 percent and 6 percent, respectively, from 6.8 percent and 6.1 percent previously. Despite the fact that the central bank forecasts healthy growth in the first half of the coming fiscal year, concerns about domestic demand and private investments remain.
As some economists have noted, the Governor’s remarks about “managing a durable, strong, and inclusive recovery” reveal ongoing concerns about the economy’s uneven nature. In terms od f inflation, the committee has kept its full-year forecast of 5.3% for 2021-22. (with some changes to the third and fourth quarter estimates). While the committee is concerned about the persistence of high core inflation, it will take solace in the sharp reductions in excise duty and VAT on gasoline and diesel, which have lowered retail prices. As the MPC pointed out, this will have “second-round effects over time.”
In addition to normalising liquidity, the policy pivot’s next steps include raising the reserve repo, changing the accommodative stance, and then hiking the repo rate. However, due to the Omicron variant and changing growth-inflation dynamics, the timelines for these steps are now uncertain. Given the uneven nature of the economic recovery, the MPC should proceed with caution, rely on data, and calibrate its next steps carefully.