Stimulus steps may revive growth

The decision of the Monetary Policy Committee of the Reserve Bank of India (RBI) to keep the interest rates unchanged was expected. At its June meeting, held last week, the committee decided to continue with the benchmark policy repo rate and to maintain the accommodative stance on credit. It rightly felt that reviving economic growth should continue to get priority now. That was why it announced more measures intended to ensure that there is enough liquidity in the economy and to ease some existing financing constraints. The RBI will provide support to the government’s borrowing plans through its market purchase operations. State borrowings will also be covered by this programme. Assistance to the MSME sector, which has been hit hard by the pandemic, will be increased. The low-interest rates will continue, the loan limits will be enhanced and a special liquidity facility will be created. A separate credit window has been created for "contact sensitive’’ sectors like hospitality, and travel and tourism. All these are welcome measures. But businesses may not go in for credit just because it is available. There are also conditions that continue to constrain both lending and borrowing.

The RBI has also lowered its real GDP growth projection for 2021-22 to 9.5 per cent from the previous estimate of 10.5 per cent, in view of the second wave of the pandemic disrupting economic activity again across the country. Estimates for the first half have been scaled down, while they have been raised for the second half, perhaps because vaccinations might make some impact by then and the economy may start recovering. But there are doubts whether the optimism will hold, because the predictions are not based on adequate data, which may not be available. There are also uncertainties about the future course of the pandemic and its possible effects.

The RBI thinks there may be a slight uptick in prices but it hopes that the increase will be within its inflation-targeting framework and will not cross the upper limit. There are uncertainties in that respect also. Fuel prices have been raised continuously for weeks and they may be raised further. This will have an impact on the prices of all goods. Commodity prices are increasing globally and they will push the prices up within the country too. The RBI will have to remain vigilant about the price situation. It should also be noted that monetary policy can go only to an extent in addressing the present situation. It is for the government to come up with stimulus measures to revive growth, prevent job losses, create new jobs and extend support to support the poor in both urban and rural areas whose livelihood and incomes have been affected.