Monetary Policy Runs Out of Steam

The Monetary Policy Statement and the governor’s statement announcing it held no surprises. Despite a promise to come out with out-of-the-box measures to sustain growth, the policy was pretty much a repetition of the previous statement, with minor variations. RBI seems to want to communicate that there is only so much that it can do. The governor’s statement contained an interesting observation: on balance, the Monetary Policy Committee (MPC) was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in H2 2020-21 and to nurture the recovery after it has taken root. Since this is followed up with the MPC’s decision to hold the policy rates unchanged and to continue with an accommodative stance of monetary policy, ‘policy support from all sides’ can only refer to the government.

The government should understand that it is the prime mover. RBI’s liquidity measures, expansive and innovative as they have been, have only served to increase the volumes of cash the banks have been depositing with the RBI under reverse repo. Banks have not been lending to the public much. The new window RBI has opened for banks to access money to lend to contact-intensive services is likely to meet with the same fate as earlier targeted long-term repo operations: it would serve to keep RBI’s conscience clean while providing little additional lending to the target beneficiaries. Yet, it is true that record amounts are being raised through corporate bonds and commercial paper. This is a welcome development, aided by easy liquidity supported by RBI’s accommodative stance. However, if RBI were to include corporate bonds in its asset purchase programme or repo operations, the corporate bond segment would get what the bulk of the nation has been thirsting for: a shot in the arm.

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The government must front-load its planned spending, apart from pressing ahead with the vaccination programme. The fate of the economy hinges on the government acting as the leading sector.



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