DAILY NEWS ANALYSIS

GS-III : Economic Issues RBI

08 February, 2021
3 Min Read

RBI on prioritising economic growth

RBI on prioritising economic growth

Present Stance of RBI

The RBI’s Monetary Policy Committee (MPC) has expectedly yet again left benchmark interest rates unchanged and reiterated that it will continue with its accommodative stance (cheap money policy), at least into the next fiscal year, in order to secure a sustained economic recovery.
The central bank’s rate setting panel has reasoned that while there are promising signs in the welter of data that it has looked at, the ongoing recovery is “still to gather firm traction” making it crucial to provide continued policy support for restoring growth.

Retail inflation in India

The sharp deceleration in retail inflation in December, when headline CPI inflation eased to 4.6% after being stuck above the RBI’s upper tolerance threshold of 6% (nominal anchor rate) for six straight months, clearly appears to have smoothed the brow for the six members of the committee and provided them the space to stay focused in the near term on prioritising growth.

Parameters restoring confidence on India’s economic growth:

The rollout of the COVID-19 vaccination programme as well as the Union Budget’s proposals to give a boost to infrastructure, and innovation and research, among other things, have been recognised as factors likely to restore confidence and lend a fillip to the growth momentum, respectively.

Impact due to farmer’s protest

While overall rabi sowing has been 2.9% higher year-on-year as on January 29, the farmers’ agitation involving cultivators from key crop-growing States including Punjab, Haryana and U.P. is a cause for concern as a protracted impasse has the potential to disrupt farm output threatening both growth and inflation dynamics.

Recent measures taken by RBI

The two main measures involve extending the enhanced ‘held-to-maturity’ dispensation for banks buying debt issued by the Centre and States by a year up to March 31, 2023, and allowing retail investors to make direct online purchases of government securities via a ‘Retail Direct’ gilt securities account held with the RBI.

Impact of government borrowing on economy

With the Centre alone targeting to borrow as much as ?12-lakh crore at the gross level in the coming financial year, the debt manager faces the unenviable task of ensuring that the flood of debt not only finds takers at a price that does not push up borrowing costs for the rest of the real economy but also of trying and preventing it from crowding out demand for private investment credit.

Conclusion

With interest rates being held at near record lows and inflation still persisting above the RBI’s benchmark repo rate of 4% resulting in negative real returns for savers, the RBI can ill afford to drop its guard on vigilance over prices.

Source: TH

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