Accommodative stance should continue

The market expectation is that the Monetary Policy Committee (MPC) of the Reserve Bank would raise the reverse repo rate and possibly also ramp up absorption of surplus liquidity through one or another of the central bank’s reverse repo windows. The key thing is for the RBI to maintain the assurance that it would continue with an accommodative stance of monetary policy, and it is to be hoped that the MPC would not change course on this front.

Inflation has been sticky, primarily through input cost rise. Energy prices have been one source of worry. With the Omicron scare, oil prices fell $10 per barrel, but could recover if the threat from the new coronavirus variant proves to be less potent, as it seems likely, than initially anticipated. The good news is that the oil cartel, Opec, is sticking with its modest monthly production increase schedule. The not-so-good news is that the US Fed is likely to accelerate withdrawal from its extra-accommodative monetary policy sooner rather than later, thanks to persistent inflation. In the US, unemployment is falling even as the number of fresh jobs created dwindles, meaning withdrawal of labour from the workforce, probably due to Covid concerns. The resultant rise in wages is feeding into persistent inflation, and the yield on US treasuries has been pushing up. The dollar has been strengthening against other currencies. The MPC will have to weigh the trade-off between the inflationary effect of pricier imports, should the rupee fall on account of a reallocation of capital away from emerging markets and the dampening effect on growth from any policy rate action. Yields have been going up in India, too, and an upward tweak in the reverse repo rate and absorption of greater volumes of surplus liquidity should compensate for the effects of US Fed action.

Growth is picking up in India, but still remains vulnerable. Omicron apart, easy availability of credit is vital for sustaining economic momentum. The RBI would also need to guide banks on accommodating small companies that have repayment difficulties.


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