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Below are Perspective on RBI Monetary Policy Committee`s announcement by Prof. Krupesh Thakkar, CFA, HoD - Financial Markets, ITM B-School

The decision of status quo on short term interest rates was on expected front, but the more important was the tone of the stance of MPC, especially when we stand at inflection point of cloudy growth prospectus and elevated worries on inflation. This is welcomed as a durable recovery needs continued policy support. Though the impact of the second wave of Covid on the economy would be less severe than before, the hit on urban demand and spread of covid in rural areas do give some downside risks to growth. Accordingly, FY22 GDP growth forecast has been cut to 9.5% from 10.5%.

On the inflation front, RBI seems to be a bit less worried and has recognised some upside risks emerging from some supply disruptions owing to latest locked-down and some cost-push factors showing signs of being exaggerated, especially from rising commodity prices. On the positive side, the normal monsoon will help in keeping food prices in check.

On the liquidity issues, RBI has cleared its stance that the focus will turn now to equitable distribution of liquidity from the liquidity management. This is evident also as interest rates are eased across the spectrum and spreads have narrowed as they were linked to market benchmark rates. These proactive, pre-emptive and timely measures would continue to keep this transmission going forward. To keep supporting central and state borrowing, the announcement of GSAP 2.0 was also expected which will keep the yields going up.

Overall, as RBI rightly put, policy support is needed from all sides to nurture recovery on one side, and combined efforts are also called for to keep rising prices in check on another. Going forward, expect RBI to support growth using all the space available to it.

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