The tone of the monetary policy remained balanced yet non-committal, with no change in stance, stressing on inflation-fighting credibility
Before the Goods and Service Tax (GST) was implemented in the country, people used to remain anxious about the Union Budget as the finance minister’s decision to increase or decrease excise duty could have a direct impact on everybody’s pocket. After the excise duty was subsumed into GST, the Budget lost its punch. But the Reserve Bank of India led Monetary Policy Committee’s (MPC) bimonthly meeting assumed a similar character as its function of determining key repo rate could swing people’s monthly payouts for loans, and people would shudder at the prospect of a rate hike.
The MPC, however, spared people on Thursday by retaining the repo rate unchanged at 6.5 per cent basing its analysis on lower inflation, and high frequency indicators such as domestic demand conditions, improving household consumption and investment activity.
The tone of the monetary policy remained balanced yet non-committal, with no change in stance, stressing on inflation-fighting credibility. The MPC continued its stance of the withdrawal of accommodation — which suggests tightening of liquidity to fight inflation — as the Reserve Bank of India remains cautious about the still-high inflation as against the target of four per cent and emerging risks from the still-fluid global situation.
The central bank also does not seem keen to slash interest rates until it is assured of a good monsoon as the upside risks to inflation may exist, primarily from the manifestation of El Nino and its impact on monsoon. Lending rates, however, are unlikely to see any pressure because of excess liquidity caused by higher amounts of cash deposited following the withdrawal of Rs 2,000 banknotes from circulation.
According to RBI governor Shaktikanta Das, almost half of Rs 2,000 banknotes which are in circulation amounting to Rs 1.8 lakh crores have returned to bank, and 85 per cent of which or Rs 1,53,000 crores was deposited in bank accounts, bringing deluge of liquidity to the Indian economic system.
The Assembly elections in five states — Telangana, Madhya Pradesh, Chhattisgarh, Rajasthan and Mizoram — could also infuse poll-related liquidity into the system by the end of this year. Apart from this, a surge in foreign investments into Indian equity following a slower growth in China will increase rupee liquidity in the market. Global investors have bought more than $7 billion of local stocks since March, on track for the biggest quarterly purchases since the end of 2020.
As healthy liquidity conditions keep inflation above the mandated four per cent target and also provide adequate support to the economic growth, the MPC is unlikely to cut repo rate until December. By the end of the year, the Russia-Ukraine crisis which pushed the world into uncertainty could get closer to some sort of settlement as the world cannot remain in the crisis mode any longer.