Balanced Approach To Monetary Easing

The MPC did its best, given that a rate cut was not feasible, by deploying other credit-enhancing steps for MSME and real estate

- Himadri Bhattacharya

The Monetary Policy Committee of the RBI unanimously kept the policy repo rate unchanged at 5.15 per cent on Thursday, in its last meeting of this fiscal year. This was almost universally anticipated, although there were some views that since Budget 2020-21 refrained from announcing any significant fiscal stimulus for spurring growth, the RBI could step in do some more heavy lifting by cutting the rate again.

That hasn’t happened now, but in the words of the MPC, “there is policy space available for future action”. The MPC has assured that the current accommodative stance of the policy will continue till there is growth revival in the economy. This assertion is somewhat at odds with the recent statement of a top official of the RBI, in which he implied that structural reforms would now hold the key for putting the country back on a decent growth path.

Inflation caution

The recent increase in retail inflation, most notably its headline print of 7.4 per cent in December 2019, has established that it is on a rising trajectory. The actual CPI inflation for Q3 2019-20 at 5.8 per cent exceeded the projection made earlier by 70 basis points (bps).

As a consequence, the MPC has now revised upwards the CPI inflation projection for Q4 2019-20 to 6.5 per cent and 5-5.4 per cent for H1 2020-21, both of which are way above the 4 per cent target. With regard to the pace of economic activity, the MPC feels that it still remains subdued and the few indicators, like core sectors’ growth or PMI for manufacturing and services, that have shown some buoyancy in the recent months are not yet indicative of a broad-based recovery.