A policy of status quo

The Reserve Bank of India’s (RBI) decision to maintain status quo on interest rates is on expected lines. The overall environment is uncertain as yet with domestic economic recovery being uneven and with an upside risk to inflation from food prices consequent to a deficient monsoon. The near-term signs are favourable for a dip in headline inflation thanks to the sustained fall in global oil prices that have been passed on to consumers by the government, and the relative stability in the foreign exchange markets. The medium-term picture, though, is still hazy with a number of unknown variables, and the RBI is obviously not willing to risk its projection of 6 per cent inflation by January 2016 going astray. It is clear that the central bank will do whatever is necessary to ensure that the line is not crossed. The current account deficit is projected to remain well under control though non-oil, non-gold imports in the April-August period have risen to the highest level since March 2013. With credit growth remaining well below deposit growth and the impact of the government expenditure programme kicking in, liquidity has not been a problem in the market. The policy stance, therefore, appears to be one of caution tinged with optimism on the short-term economic variables.

What should be a cause for worry though is the sluggishness in credit offtake which is forcing banks to lower deposit rates, in turn affecting senior citizens who live off interest income. State Bank of India recently cut rates on some tenors to maintain its margins and it is likely that other banks will follow suit. The RBI has also maintained its projection of 5.5 per cent growth in GDP for this fiscal while pointing out that growth could slow down “mildly” in the second and third quarters before picking up pace again in the fourth. With the picture on agriculture not very clear at the moment and industrial output dipping in July after a good show in the couple of months preceding that, the central bank’s caution on growth prospects is understandable. Going forward, the critical determinant of the sustenance of the recovery would be resumption of investment activity. Forget new projects, even if the stalled ones resume in right earnest there would be a positive impetus to growth. The fall in oil prices which has wiped out under-recovery in diesel has given the government much-needed elbow room in managing the fiscal deficit. If the disinvestment programme proceeds apace — and at this point in time it does appear to be doing so — then there is room for justifiable optimism on the government meeting the challenging target of a 4.1 per cent fiscal deficit this year. Of course, these data will be critical inputs for the RBI to reverse direction on the rate cycle.

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Printable version | Jan 17, 2022 10:47:02 AM | https://www.thehindu.com/opinion/editorial/reserve-bank-of-india-policy-rates-a-policy-of-status-quo/article6462527.ece

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