No change: RBI’s lame-duck policy

IN PERSPECTIVE

The unanimous decision of the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India to maintain the status quo on policy rates and 5:1 majority decision to continue with the accommodative stance was not only a surprise but also a missed opportunity for commencing the ‘normalisation’ of the ‘glide path’ from the ultra-loose policy rate cycle of the last 18 months. The last time the RBI changed policy rates was in May 2020.

The repo rate, the rate at which the banks borrow from the RBI is unchanged at 4%. The reverse repo rate, the rate at which interest is offered by the RBI to banks that park their excess funds with it, also remains unchanged at 3.35%.

A majority of the economists, analysts and market experts had rightly sought a minimum increase in the reverse repo rate at least by 25 bps to serve two purposes -- signalling the end of the ultra-loose rate cycle, and reducing the rate corridor difference between the repo rate and the reverse repo, which should ideally be 25 bps. Presently, the difference is 65 bps and thus not able to absorb the excess liquidity of almost Rs 10 lakh crore in the system, which is also inflationary -- prone to taking the route of feeding conspicuous consumption and money laundering.

It is a paradox and an irony that the excess liquidity is neither boosting the credit offtake by the banks, NBFCs / HFCs nor able to control the WPI and CPI inflation.

The marginal increase in lending by the banks has been only to ‘retail credit’ such as personal loans, credit cards and vehicle loans and not to core sectors like infrastructure, real estate, MSMEs, steel and cement, which are the true engines of growth through the multiplier effect on investment, employment, income and savings cycle.

The unsoaked humongous liquidity is also triggering domestic inflation, coupled with the ‘imported’ inflation due to the sharp rise in the global crude oil price, which has surpassed $91 per barrel. The surge in oil and petroleum prices will have a cascading effect on domestic prices and hardships to the common man.

The ultra-dovish policy by the MPC is a validation of the allegation that the RBI is functioning as an ‘extended arm’ of the central government. The focus of the Union budget was on the great infrastructure push, with an all-time high allocation of Rs 7.5 lakh crore. Read that in conjunction with the government’s huge borrowing plan of Rs 15.7 lakh crore.

Shockingly, the RBI has not come out in its policy with the ‘funding plan’ of the proposed government’s borrowings. The dual role of the RBI as merchant bankers to the government and its regulatory role to curtail inflation as a catalyst to promote growth on a durable basis has led to this situation of inaction and fait accompli.

The MPC seems to have taken a very safe route by merely toeing the growth philosophy of the Union budget, conveniently forgetting its mandate of curtailing inflation. The impact of global inflationary pressures and the flight of money to the tune of nearly Rs 80,000 crore by the FIIs, post-Budget, has not been addressed.

The contradiction in the CPI inflation projections of the MPC is evident. The policy accepts hardening of crude oil prices as a major upside risk to inflation, core inflation (excluding food and fuel) being elevated, but paradoxically it projects inflation for the full year 2021-22 at 5.3% with Q4 (Jan-March 2022) CPI inflation at 5.7%. This looks unrealistic.

Taking into account the surge in crude oil prices at $91 per barrel, local petrol and diesel prices hovering around Rs 100/litre (expected to be hiked in March, after the elections in five states), it is intriguing that CPI inflation for 2022-23 is projected at 4.5%, which beats rational calculations.

Price hikes of goods and services due to an increase in higher input costs, supply bottlenecks and huge infra spend proposed by the government next year will lead to spiralling inflation.

The RBI perhaps does not want to disturb the applecart during February/March and upset the government, banks, financial institutions, HFCs, who have just started aggressively lending to corporates and housing finance or other retail loans, and has hence gambled by not addressing the upside risks of a depreciating rupee, rise in global commodity/crude oil prices, ignoring the tightening of monetary policy and increase in interest rates by the central banks of US, UK and Europe.

The RBI can take shelter for not providing guidance for funding the government borrowing to the tune of Rs 15.7 lakh crore by stating that the calendar for borrowings will anyway start only from April 2022.

In sum, the dovish MPC meeting has turned up a lame-duck policy.

(The writer is a former banker)