When the road ahead looks cloudy, it is often best to clear the air without causing an accident. The Reserve Bank of India (RBI) seems to have done the same. On Wednesday, our central bank did not change its repo rate and banks’ lending rate to 4%. It also has its reverse repo rate, which absorbs their additional funds, which is stable at 3.35%. This confirmation of easy money is not surprising. However, it has kept the growth forecast for our economy at 10.5% in 2021-22, while RBI Governor Shaktikanta Das has acknowledged the growing uncertainty over our prospects this year. For the foreseeable future, the RBI has made some adjustments on how inflation will ease over the next few quarters, with the key figure of this measure forecast to be safe below its tolerance limit of 6% this fiscal year. Taken alone, these figures can look forward to the new financial year with a mix of relief and optimism. But they were vaguely adopted for good reason. As the timing of RBI’s data inputs slows down, the implications of sudden Kovid infections in India may not be taken into account. Partial lockdowns returned to key industrial states last week and trade activity is set to suffer.
Thankfully, inflation has been within the RBI’s target range, of late, allowing it to keep its policy high, improve its bond-buying plans and expand its exclusive on-tap liquidity allocation for another six months. Our short-term price losses appear to be more or less balanced with an commodity uptrend offset by some reduction in taxes on petroleum products. According to RBI estimates, retail inflation will rise to 5.2% in the first half of 2021-22, after averaging 5% in the three months to March 31, before rising to 4.1% in the third quarter. At the end of%. However, the extra money pumped into our economy does not come to raise retail prices, does not interfere with Kovid supplies, our external scenario is harmless and we have normal monsoons. Any vicious turn in these factors could threaten that perspective. Currently, the RBI is confident of its control over the yield curve on government bonds, despite post-budget market signs that investors are seeking higher returns on long-term tenure paper to offset inflationary losses. The RBI has announced a new program of buying bonds in the secondary market in support of reducing the yield, which is crucial for India’s debt stability, and government spending on borrowing. Under this, it specifies the upfront cost for bond buybacks over a given period. In the current quarter, it has set a target ₹1 trillion. This is in addition to the usual market activities to maintain monetary conditions. While such exercise will ease the upward pressure on yields in the short term, bond investors will eventually be wary of the inflationary impact of the expanded RBI balance sheet.
Since the Kovid crisis hit our central bank has worked well without trying conditions, and its latest moves are not wrong, now financial dominance is back on a large scale. The weaknesses of our economic recovery will not allow it to withdraw its support measures at this time. But it must also be wary of threats to price stability.