Government must take steps to boost demand

It was not unexpected that the newly constituted Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would maintain the status quo on the benchmark repo rate and continue the accommodative stance it has adopted recently till economic growth sees signs of revival. Last Friday’s meeting unanimously decided to keep the rate at 4% and saw the current trend of rising inflation as a temporary phenomenon.

It expects inflation to be in the range of 4.5-5.4% in the next few months and drop to 4.3% in the first quarter of the next financial year. It may not go above 6%, which is the upper limit of its inflation-targeting regime, and so there is no need to think of measures to fight it now. The RBI has rightly decided that giving a push to growth should be prioritised over other considerations now.

The apex bank has predicted that the economy is likely to contract by 9.5% this financial year. After a huge knock in the first quarter, the second and third quarters would see an easing of the contraction. The fourth quarter might see a small pick-up in growth. But the possibility of a downward risk would persist. In a normal year, the festival season provides a big boost to the economy but this year the season’s demand would be much less. Worries over the actual impact of the pandemic, which is yet to peak, add to the uncertainty. So, it is likely that the MPC will maintain the rates for the entire fiscal year. In any case, the scope for any further easing is limited, as it may have an adverse impact on household savings and financial stability.

In a situation of limited possibilities, the aim of the RBI’s liquidity measures was to improve the transmission of previous rate cuts involving many instruments including bonds, state government loans and corporate papers. It has promised measures to ensure the success of the borrowing plans of central and state governments. These may again provide conditions for the flow of more liquidity into the economy and the markets but whether this will indeed happen is the moot question.

Much of the implementation of the monetary policy happens through banks and they have been cautious about credit facilitation. Business is unsure about availing credit, even when it is available, because of the uncertainty about demand. In this scenario, it is for the government to create conditions to boost demand through appropriate fiscal policies and measures. The RBI is doing the best it can though liquidity enhancement, but it will serve the purpose only if it is complemented by government action.