The Monetary Policy Committee Has Failed To Walk Its Talk

Context: Disconnect between the commentary and policy action of RBI’s repo-rate-setting panel may cost us, dear, in time to come.

Background:

• RBI Governor stated that policy will remain accommodative “as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of covid-19 on economy.
• Only reverse action that RBI took was to end its G-SAP (government securities acquisition programme) under which it was infusing liquidity into a system already replete with liquidity.

Issues with continuing accommodative policy stance

• Not reflecting the strengthening growth impulses: High-frequency indicators for Q2:2021-22 suggest economic recovery has gained momentum.
  • International rating agency Moody’s revised India’s rating outlook from negative to stable.
• Neglected policy focus on inflation: Despite higher growth prospects, core inflation remains “sticky” and “elevated global crude oil and other commodity prices, combined with acute shortage of key industrial components and high logistics costs, are adding to input cost pressures.”
• Liquidity conditions are not in sync with the macroeconomic developments hence leading to financial instability.

Conclusion: Even if the economy still needs policy support, it does not really need as much support as during the peak of the covid pandemic. Easy money today could lead to high interest rates tomorrow and the risk need to be addressed.