The monetary policy committee held its meeting and came up with the decision that the interest rates have been kept unchanged. The RBI has also expressed hope that the monsoon being very positive will infuse tailwind in the economic revival. There are several other aspects of this monetary policy given the fact that we are battling the pandemic right now, it becomes really important to understand what exactly the central bank’s policy is and what kind of roadmap does it project for the economy.
Clearly the RBI’s monetary policy committee has packet for growth, it acknowledges that the retail inflation for the full financial year will be around 5.1 per cent. The RBI’s monetary policy committee has the brief that the inflation target should be 4 per cent with a tolerance band of 2 percentage points on both upper side and lower side, it is closer to the upper band right now. RBI monetary policy committee has decided to support growth by keeping the repo rate unchanged at 4 per cent and in addition it has actually made the policy stance accommodative without any condition attached.
If we look at the foreign exchange reserves as the Governor pointed out it’s almost touching 600 billion US dollars apart from the loans which we’ve given which are tantamount to about 40 to 45 billion dollars. We have almost crossed 600 billion plus dollars which we have in terms of foreign exchange reserves. Apart from that the money supply M3S as we say is around 9.9 per cent. Prior to 2014 it used to hover around 17-18 per cent, whereas this government has been able to contain it between 12 and 13 and the last year it was 9.9 per cent. So, the money supply is under fairly good control and as a result the current inflation is around 4.3 per cent so the inflationary pressure has been brought fairly well under control and that is why they’re able to project a fairly well controlled inflation of Consumer Price Index (CPI) of 5.1 per cent for the next year. Apart from this when we look at the GDP growth though the projections have been downsized as from against 10.5 per cent to 9.5 for the following year 2021-22 however if you look at the world around, we are the only country which is receiving the largest amount of FDI. Last year itself we received a FDI of about 81.7 billion dollars and the portfolio investment was roughly about 37.6 billion dollars. The factors that there is growth is, we saw large numbers of banks and financial institutions giving out profitability’s and their NPAs is fairly under control despite Covid, lockdowns and currency transactions being low. Governor also reiterated the Rs 50,000 crores facility which he announced in April 2021 asking businesses to avail these loans. The FDI income clearly shows that the world is looking at a positive India so that they can benefit through those investments.
This inflation at 5.1 is not a worry, certainly the oil pressure is a small concern but the government has it under control because they had actually raised large amount of taxes and almost about 70 per cent of the oil composition is nothing else but taxes and the oil directly does not impact in the short run because most oil which is purchased by any country is actually purchased through long-term contracts, not purchased from open market, only a small component is purchased from the open market which gets influenced by the daily price movements of the oil.
So large amount of the oil, which is produced by any country, including India, is purchased over long contracts, which used to be signed 15-20 years in advance but now are signed for a period of 3-5 years. Even currently most of our contracts are ranging between 55 US dollars a barrel to 60 US dollars a barrel. So, as a result even if the oil price goes up and given the fact that the oil consumption is low because of lockdowns and less activity so we do not see that excess requirement which is required on a day-to-day basis to be purchased from the open market. So, from that perspective we don’t see the international oil prices immediately impacting but certainly the trade factors are going to play a critical role. Fortunately, the rupee has also been stable, although had seen some appreciation which also is a positive sign and that’s where we saw the balance of trade also benefiting.
When Governor spoke about India being made into a vaccine capital and the pharma advanced sectors advantages to be reaped, he is probably hinting that there is need for some sort of government policy initiatives, it may be coming in the form of fiscal policies, in the form of policy incentives or policy support from the government side. Realising and taking full advantage of India’s vaccine capacity that already exists and plus being major pharmaceutical manufacturing base, these are the sectors which can be refurbished through policy support necessarily by the union government.
Clearly there seems to be a lot of potential as the RBI Governor is hinting towards giving push to vaccine manufacturing. This is the insight on RBI’s monetary policy, this is what the policy means for India’s growth story, what’s the road ahead and what more needs to be done.
(The author is an Advocate at Mumbai High Court)
