A low-interest rate regime is considered a key weapon to revive consumer demand and induce normalcy in the economy
In the wake of heightened uncertainty caused by the second wave of coronavirus cases across the world, especially in India, the Reserve Bank of India has left key lending rates unchanged once again and committed to continue an accommodative stance for the monetary policy. This open-ended policy gives comfort to participants in equity and bond markets, in particular, and borrowers, in general.
The central bank claimed that rural demand remains buoyant and record agriculture production in 2020-21 bodes well for its resilience. Urban demand, which it said has gained traction, is expected to get a boost with the vaccination drive. Though high-frequency lead and coincident indicators, including the Goods and Service Tax receipts, reveal that economic activity is normalising, the six-member Monetary Policy Committee (MPC) preferred to remain cautious about interest rate to support the growth in the economy in view of a surge in coronavirus infections.
A low-interest rate regime is considered a key weapon to revive consumer demand and induce normalcy in the economy. It would affect sectors like construction, automobiles and consumer durable goods, which will have a trickle-down effect on the economy.
Despite a worsening Covid situation in the country, the RBI predicted a 10.5 per cent growth in the Indian economy — the elusive double-digit growth figure that Indian governments have been running after. In support of its favourable assessment of the economy, the RBI listed three factors — the vaccination programme being speeded up and increasingly extended to the wider segments of the population; the gradual release of pent-up demand; and the investment-enhancing and growth-supportive reform measures taken by the government.
While the policy was broadly appreciated by all economists, the RBI’s announcement to purchase bonds worth Rs 1 lakh crore from the secondary market to keep long-term rates in check has attracted most of their praise. The move, analysts claimed, would anchor bond yields in the secondary bond market. Indian bond yields have risen sharply after finance minister Nirmala Sitharaman proposed to borrow Rs 12 lakh crore in the previous fiscal. After the Tuesday announcement, the bond yields declined by 0.12 percentage points.
The RBI, however, is concerned about the recurrence of global financial market volatility like the bout experienced in late February, which could accentuate the downside risks for India. Though the country has enough firepower in terms of foreign exchange reserves to handle any global volatility, the central bank must remain vigilant to prevent the repeat of the ‘2013 US taper tantrums’.
An elevated inflation rate is also a cause of concern for the RBI, though it has decided to accord priority to economic growth in the near future. It projected retail inflation to be around five per cent in the current fiscal, which is one percentage point higher than the RBI’s mandated four per cent inflation rate. It, however, hinted at a coordinated action by the Centre and states to bring down tax on petrol and diesel. If the tax on fuel was brought down, it would be happy news for the common man.