RBI'S BLANK CHEQUE FOR GROWTH
Prioritising livelihoods over the threat of inflation, RBI bats for growth and sticks to its easy money policy EPISODE #60
Dear Reader,
A very Happy Monday to you.
Just days after presentation of the Union Budget, the Reserve Bank of India (RBI) undertook its scheduled credit policy review. Pundits had forecast that the central bank would signal it is turning off the tap for easy money. No such thing happened.
Instead the RBI opted to retain the easy money policy stance. Its logic was simple. The once in a century health shock caused by the covid-19 pandemic had snowballed into an unprecedented economic crisis. Loss of livelihoods had caused widespread devastation. In this backdrop RBI believes that growing the economy to restore livelihoods has to be the top priority. Bravo!
This week I explore RBI’s out of the box move and how its actions—after a long time—are actually aligned with that of the union Finance Ministry. A rare jugalbandhi as it were to revive growth.
The cover picture for this week is sourced from Unsplash. Thank you Manyu Varma.
A big shoutout to Lakshmisha, Gautam, Vandana and Aashish for your informed responses, kind appreciation and amplification for last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
A GROWTH TURNPIKE?
Less than a week after Finance Minister Nirmala Sitharaman presented her Union Budget as a big bet on growth, the country’s central bank followed suit. The Reserve Bank of India (RBI) ignored the advice of pundits and chose instead to bat for growth. Accordingly the central bank continued with its easy money policy.
The operative part of this is that Monetary Policy Committee or MPC (the apex body chaired by the RBI governor deciding monetary policy) is as follows:
A unanimous decision to keep the policy repo rate unchanged at 4%;
A majority of 5 to 1 to stick with the “accommodative stance”.
Explaining the central bank’s decision, RBI Governor Shaktikanta Das said that RBI would continue with its easy money policy:
“As long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy.”
Later in his address the Governor alluded to the Union Budget for 2022-23 and argued that the circumstances augured an economic revival.
“Going forward, government’s thrust on capital expenditure and exports are expected to enhance productive capacity and strengthen aggregate demand. This would also crowd in private investment.”
And then added how the RBI’s bold stance on monetary policy, despite several headwinds, will only reinforce the growth sentiments.
The conducive financial conditions engendered by the RBI’s policy actions will provide impetus to investment activity.
The surveys done by the RBI reveal that capacity utilisation is rising, and the outlook on business and consumer confidence remain in optimistic territory, which should support investment as well as consumption demand. The prospects for agriculture have brightened on good progress of winter crop sowing.
The Jugalbandi
This chorus of support for reviving growth is a rare alignment of policy perspective between the government and RBI. History is replete with friction especially with some erudite governors deciding to go all Rambo.
This is not to suggest that RBI should toe the line of the union government. Of course not. The central bank is an independent institution—assigned with the task of containing inflation within prescribed limits and managing the health of the financial sector—and should remain thus to preserve the economic well being of India.
Instead I am suggesting that in some instances in the recent past the crossed wires were either an overreaction or a governor playing to the galleries.
The finance ministry has already played its cards. The RBI credit policy segues with the union budget’s perspective. I detailed FM Sitharaman’s essay at length last week. Sharing the link below in case you may wish to read it afresh.
The tenor of the monetary policy review, like the Union Budget, leans towards livelihoods. In the first year and when the Delta variant devastated India last year, the priority was saving lives. With the progressive roll out of the vaccine—amazingly India is rapidly closing in on the incredible target of giving a double jab to 900 million people—and covid-19 losing its intensity, policy undertook a fresh pivot in the lives vs livelihood trade off.
The monetary policy review is signalling that it is accelerating this shift and the policy response is acquiring a resilience.
“As we gain valuable experience from repeated waves of the pandemic, our responses are also becoming nuanced and calibrated. Protecting life is paramount; and protecting livelihood is rising in the hierarchy of priorities. The focus is on securing the economic and financial conditions of the vulnerable, the wage earners and all those who suffer the most.
Accordingly, the emphasis is shifting to targeted containment strategies and a push towards universal vaccination and booster doses.”
The RBI is also suggesting that there is a new constellation of circumstances, including some improvement in consumer and business confidence (see table above), which augur well for a growth revival. Instead of viewing these circumstances in isolation, the central bank is arguing they should be viewed as trends complementing each other.
“The demand for contact-intensive services is still muted.
Going forward, positive impulses for quickening the pace of recovery emanate from buoyant Rabi prospects, robust export demand, accommodative monetary and liquidity conditions, improving credit offtake, and the continued push on capital expenditure and infrastructure in the Union Budget 2022-23.”
Interestingly, both the RBI and FM Sitharaman, do not seem to have accounted for the contact economy in their math. Understandable, as frequent local lockdowns has meant that the revival in the contact economy is yet to gain momentum. Indeed if there is no fresh wave and the jab’s effectiveness keeps the worst of the covid-19 at bay then there may be a surprising upside to the revival.
Seen this way the growth projections put out by RBI therefore probably reflect the lower bound.
“Looking ahead, domestic growth drivers are gradually improving. Considering all these factors, real GDP growth is projected at 7.8% for 2022-23 with Q1:2022-23 at 17.2%; Q2 at 7.0%; Q3 at 4.3%; and Q4 at 4.5%.”
It is clear that both the RBI and the union government have cast the lot favouring an economic revival. The battered Indian consumer, despite inclement circumstances, has gamely hung in there. All eyes now on India Inc.
Recommended Reading
Amazon’s decision to shut down Westland Publishing threw a lot of people in a tizzy. One such conversation on Twitter led to the sharing of a list of books they had published.
I was drawn to Delhi: A Soliloquy by M Mukundan. The original is in Malayalam and has been translated into English.
The book is the tale of a migrant from Kerala. And like all migrants the central character too is drawn to Delhi with the hope of eking out a better life—an improvement over the life back in Kerala. Unfortunately he does not catch the break he seeks; neither do the clutch of fellow migrants from Kerala who serve as his companions in the journey.
Indeed what follows is a tale of depressing struggles and heart breaks. The plot of the book spans four decades of Delhi’s modern history. Particularly distressing is the expose of the cynical world of national politics fostering an incestuous cabal, who for decades have mocked the poor by turning the business of poverty alleviation into a corrupt enterprise.
This book captures India’s missed opportunities—by errors of omissions and commissions—through the eyes and lives of hapless migrants. A grim reminder of the fate that would have befallen us if our migrant parents had not caught the right breaks at the right time. It is a compelling read and I would recommend it.
Till we meet again next week. Stay safe.
The synchronization of the Finance Minister and the RBI governor, in achieving the common goal of restoring the livelihoods of the disadvantaged masses of the population, who have gone through untold suffering, during the last, almost two years, of the pandemic, is the way to go, undoubtedly. Real growth and prosperity can only be achieved, when the life condition of the weaker sections of society, is improved. If the purchasing power of the lower 700 million is improved, the upper 700 million will automatically prosper. Very encouraging move and thanks Anil, for presenting the situation, with such clarity.
Dear Anil,
A very interesting article and you are right RBI has chosen to follow the easy money policy to push development in areas like infrastructure, broad band connectivity for all , drinking water and to help the poor from recovering from pandemic .
But we need clear economic vision and well thought frameworks to harness the energy and creativity of our people.we need to increase our presence in global services by strengthening our human capital.The market for services like consulting, legal and financial advisory, education and telemedicine are ready for globalization. We need to increase our openness and liberalization so that we make the best use of our human capital.
The book you have recommended seems to be very interesting and reflects the rural urban divide of our country.