A straight jacket policy by the RBI as the Omicron threat looms

The discourse in the Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) has taken a turn post the Omicron threat. It otherwise seemed to be, more or less, straight jacketed with the RBI laying down the path to unwinding that started off in a rather mild manner in October. Let us see the main issues that the MPC was to throw light on.

First was the confidence level in the growth process, which looked upbeat post the Q2 GDP results coming in. Second was a call on the repo rate, which was not expected to change even though inflation threat remains. Third was a decision on the reverse repo rate. This was more to signal to the market that the days of easy money are over and that the RBI is going back to the 25 basis point (bps) corridor around the repo rate. The only factor drawing this back would have been the view on Omicron and its effect on the economy. Fourth is the RBI’s position on the stance, which has been accommodative all along. This, too, was not likely to change in this policy. The other decisions were to be on the GSAP position as well as the V3R auctions.

Against this background, the MPC has sent across its message. There has been no change in the repo rate, which means that there is no push to increase rates from banks. True, some banks have started raising their deposit rates, but it is more bank specific and based on their asset liability balancing. The stance continues to be accommodative, which means that we may not expect any increase for some time – and that the RBI is there to provide liquidity anytime required. As it has been mentioned, this stance will remain so till growth stabilises. By intuition, this implies that the growth state is still not fully convincing even though it is high and on target.

The V3R has always been emphasised by the RBI as being a voluntary scheme and hence was not to be interpreted as drawing out of liquidity. Therefore, the continuation of such auctions should be taken at face value and interpreted more as a means to deploy surplus liquidity by banks. As expected, these are continuing with the level going up to Rs 7.5 trillion on December 31. Repaying earlier LTROs is a mild step to reduce liquidity in the system, as the surpluses of banks can be used for this purpose.

The markets, however, have still been cautious as can be seen by the 10-year paper which had closed at 6.38 per cent for the 10-year paper on Tuesday and ended at 6.37 per cent as the policy was announced. Concerns remain on both inflation and Omicron, which carry a lot of uncertainty. The growth forecast for the year has been at 9.5 per cent, while inflation for the year is to average at 9.3 per cent. This is significant. Hence there is no change from the last policy.

The next policy in February will be coming after the announcement of the Budget. It will be crucial because the state of the economy will be clear as will the action taken by the government to counter the omicron virus – if any. Such clarity will allow the MPC to go back to looking at inflation a bit more closely. The Budget is not expected to have any major surprises in terms of the borrowing programme, which will be of interest to the MPC when deliberating alternatives. The fiscal path has already been well defined by the government. And if the virus scare is behind us, the MPC will finally have to bite the bullet and take a call on the repo rate. That will be interesting.

Madan Sabnavis is chief economist at CARE Ratings. Views here are personal.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.