The MPC recognized the need for a wiggle room at uncertain times

Monetary policy committees (MPCs) are not always easy. Macroeconomics is full of unknowns. Like India’s current MPC, when it comes to painting a corner with precise time-bound forward guidance, the task is very difficult.

At the event, Reserve Bank of India (RBI) Governor Shaktikanta Das said the monetary policy statement on Wednesday, April 7, 2021 was much higher than expected. The decision was actually made to maintain the status quo on policy rates and to maintain the central bank’s accommodation policy stance. With the second wave of covid and economic recovery, the RBI’s rate-setting MPC could rock the boat by changing its stance.

Can announce a (welcome) change in its forward guidance. Retaining the previous forward guidance of February 2021, “monetary policy is in line with this financial year and will be in the next financial year” would have left little wiggle room for the RBI if necessary.

For example, if inflation rises above the RBI’s target range of 2-6% on a sustainable basis, the bank will be trapped in a bond. Remember, the International Monetary Fund has already warned that inflationary pressures are mounting around the world. Recently, Moody’s described Indian inflation as “uncomfortably high”.

The shift to a more subtle stance, “monetary policy is favorable until the chances of a sustainable recovery are well secured while closely monitoring the evolving outlook for inflation” is therefore very welcome. Growing uncertainty is a predetermined, time-dependent path in the world. Conversely, words such as “the chances of continued renewal are well secured” are open to more diverse interpretations, allowing the RBI to make course corrections without losing credibility. Arise.

Remember, the RBI is not a powerful US Federal Reserve. Monetary policy in India, as in all emerging markets, is in fact critically dependent on the actions of the Fed, the global central bank. If the Fed tightens monetary policy sooner rather than later, the RBI will have no choice. Otherwise there is a risk of funding instability from the country.

Agreed, we no longer rely on debt flows as in the past, and it is less vulnerable to sudden stops / declines in foreign exchange flows. Higher forex reserves also give us more comfort. However, it is naive to think that we are immune to any policy reversal by the Fed. Or looks beyond its domestic compulsions when formulating Fed policy (read: be mindful of the consequences of its action on other economies).

For now, or at least as long as the Fed continues to send dollars, the RBI has the elbow room needed to “do anything to support growth.” In RBI’s view, ‘support’ means a yield curve maintained by the fundamentals of “ensuring systematic evolution”, which differs from its specified level “. , Governor Das quickly clarified at a post-policy press conference that he was responding to a question about the RBI’s attitude in future futures if the markets ask for more returns to give to the RBI.

The message is clear. Bond markets need to make the best of the ground away from the level; The rules of the game here are arbitrarily formulated by the RBI. Currently, the auction of government securities (G-Sec) is like gully cricket. Just as the bat owner has the right to walk away with his bat when she is unhappy with her announcement, the RBI today has the right to reject all bids and cancel the auction rather than bow to market forces! This is a right that was ruthlessly exercised in a recent bond auction.

However, the bond markets are optimistic: the RBI’s decision to implement the secondary market G-Sec Acquisition Program (G-SAP). Under this program, the central bank will be at the forefront of public market purchases of G-Secs to ensure a consistent and orderly evolution of the yield curve. Statement of quantity and time of purchase, With a first purchase of $ 1 trillion in the first quarter of 2021-22 The Rs 25,000 crore set for April 15, 2021 will give some confidence to the bond markets and thereby reduce yield volatility.

Yield management is the name of the game. So, the bias in favor of borrowers (especially the largest of them all, the center) continues. Low interest rates encourage investment and thereby growth. While real interest rates have been negative, this has not happened in the last several months.

Savers, however, are best advised to protect themselves. This is a dangerous game. Savings means lending, and permanent loss of savings, especially home savings, is costly. At a time when home savings are already falling rapidly, the RBI, I would say, is a wing and a prayer.

Mithili Bhusnurmat is a senior journalist and former central banker.

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