A growth focused monetary policy

News: To maintain a desired growth rate, Reserve Bank has kept an accommodative policy stance despite the new risks from elevated crude oil prices and the possibility of aggressive policy measures by the US Federal Reserve.  

What is accommodative policy stance and its impact? 

An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The central bank, during an accommodative policy period, is willing to cut the interest rates. 

The accommodative stance has surprised markets due to which the benchmark 10-year yield which had got a rise due to government’s borrowing programme has softened a bit.  

However even with an accommodative stance, RBI continues maintaining liquidity according to a calibrated policy stance. 

What is the policy adopted by other central banks globally? 

The global situation, however, is different. With rising inflation being viewed as a potent threat, many central banks are tilting towards faster tightening. 

Several emerging market economies, especially those following inflation targeting, had started raising interest rates last year in response to inflationary pressures from food and energy prices.  

This has been happening in the backdrop of rising geopolitical tensions in Central Asia and Ukraine, which is leading to a spike in energy prices. 

However it is the actions of the US Fed that matter most to India. Faced with rising inflation, the Fed has been maintaining a hawkish stance. 

Although India’s monetary policy is primarily governed by domestic factors, the effect of US Fed cannot completely be ignored. Abrupt policy changes create volatility in capital flows and currency markets, as was witnessed during the taper tantrum of August 2013. 

What are the potential risk factors that may affect Indian economy? 

While India’s external accounts are healthy (higher foreign exchange reserves, and lower current account deficits and short-term foreign debt), its vulnerability arises from high domestic debt and deficit.  

Although the rupee has remained resilient despite tightening global financial conditions. However, rising crude oil prices and current account deficits can increase India’s vulnerability. 

Rising crude oil prices remain an inflation threat, as it can also have a cascading effect on other prices. Fiscal policy (tax cuts) is perhaps the best way to deal with the pressures from commodity prices.

But given the already-stretched fiscal consolidation path, a further cut in excise duty on oil was not envisaged in the budget. 

What are RBI’s projections for the future growth trajectory? 

It has projected the economy to grow at 7.8% next year. However, Due to heightened uncertainty, the monetary policy will largely remain data-driven. 

Source: This post is based on the article “A growth focused monetary policy” published in The Indian express on 11th Feb 2022.