All eyes on RBI monetary policy as inflation threat looms over economy

Published on : 02:30 PM Apr 08, 2022

The monetary policy which will be announced by the RBI governor today will signal to the market whether India’s conservative central bank would follow the path of inflation containment as adopted by other major central banks such as the US Federal Reserve or it will continue to maintain an accommodative stance to fuel the growth despite the high inflation.

New Delhi: All eyes are on the Reserve Bank Governor Shaktikanta Das as he is set to announce the first monetary policy of the current financial year that started on Friday (April 1). Economists and market watchers are keen to know the Reserve Bank’s thinking on inflation management which is hovering above the Reserve Bank’s comfort level. India’s wholesale inflation is in double digits for the last 11 months while retail inflation was above 6 per cent in January and February.

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The monetary policy which will be announced by the RBI governor today will signal to the market whether India’s conservative central bank would follow the path of inflation containment as adopted by other major central banks such as the US Federal Reserve or it will continue to maintain an accommodative stance to fuel the growth despite the high inflation.

India’s wholesale inflation measured as the Wholesale Price Index (WPI) has been in double digits for the last 11 months and India’s retail inflation measured as the Consumer Price Index (CPI), has been above 6% both in January and February. Under the Reserve Bank of India Act, the RBI is legally mandated to keep retail inflation below six per cent. Advertisement

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Despite the high inflation, some economists and industry experts believe that the RBI monetary policy committee meeting, which started on Wednesday (April 6), is likely to maintain the low-interest regime to support a fragile economic recovery that is further threatened by the outbreak of Russia-Ukraine war on February 24.

YS Chakravarti, MD and CEO, Shriram City Union Finance says the Committee is likely to keep key policy rates unchanged in the upcoming monetary policy meeting given the fact that domestic growth is still in the early stages. He, however, says the RBI may revise its inflation and growth forecasts due to the elevated crude prices in the international market.

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“Even though the RBI is reiterating its commitment to supporting growth and easy liquidity, some revisions to inflation and growth forecasts can be expected. The overall growth rate has faced setbacks due to high commodity and input prices and chip shortages,” Chakravarti told ETV Bharat. He further said that the rising inflation, although transitory and imported, will weigh on the growth in the coming months. The rising input prices and increasing crude and global commodity prices do not hint toward a smooth path and will likely delay spending and hit business and consumer sentiment, he added.

Whatever the RBI monetary policy committee decides, it is going to be a tough call as any unwinding of the liquidity measures, which were announced in the wake of the Covid-19 global pandemic, will have a direct impact on consumer sentiment as a low-interest regime helped Indian consumers to buy automobile and homes even during the pandemic. Hardening of interest rates will also affect corporate investment which has been weak during the entire pandemic period.

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“Hardening interest rates and unwinding of various pandemic-related funding measures could create liquidity challenges, especially for the mid-corporates. Also, a likely slowdown in export demand and headwinds on account of increasing household leverage and declining incomes will impact consumption,” India Ratings had said in a note.

Shriram City Union Finance’s YS Chakravarti says the RBI needs to continue to support small businesses and MSMEs, which are just starting to emerge from the pandemic-led slowdown. “Demand for two-wheeler and retail or personal loans continues to outpace corporate demand, despite being below their pre-pandemic levels, and low-interest rates will help this trend sustain,” Chakravarti noted.

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Last week, RBI Governor Shaktikanta Das admitted that monetary policy announcements were an art of perception management and the Bank needed to communicate it to the markets and consumers. “As monetary policy is an art of managing expectations, central banks have to make continual efforts to shape and anchor market expectations, not just through pronouncements and actions but also through a constant refinement of their communication strategies to ensure the desired societal outcomes,” Das had said.

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