Growth will Continue to Drive the Monetary Policy

The monetary policy committee (MPC) of RBI has decided to keep the benchmark policy repo rate unchanged at 4% despite the fact that the rate of inflation has remained above the upper threshold of 6% continuously for six months before CPI inflation falling to 4.6% in December 2020 and the risk of elevated core inflation. On the growth front, the central bank has found strong signs of recovery in the service sector and a resilient agriculture sector from the first advance estimates of GDP for 2020-21 by the NSO. The GDP growth rate for fiscal year 2021-22 has been pegged at 10.5% however it is lower than the IMF projections. MPC has also decided to continue with the accommodative policy till as long as it is necessary for the sustained recovery and growth in the economy as the CPI inflation for the last quarter of 2020-21 is expected to remain 5.2% and will be in the range of 5-5.2% in first half and 4.3% in the third quarter of 2021-22. 
 
From the monetary policy statement, it is clear that the growth will continue to drive the monetary policy for next few quarters. Cheap money will continue to be available in the market. This will keep the borrowing cost low for the government as well as businesses and consumers. However, despite the low interest rates and the large surplus in the systematic liquidity, the credit growth has been relatively slow in comparison to the previous periods. The non-food credit growth has been very low. This clearly indicates the sentiments of the people about the recovery and growth prospects. The growth in non-food credit needs be higher for increased economic activities and this will happen only when people's confidence in the economy improves further. Perhaps this is one of the factors for the MPC to continue with an accommodative policy stance.

Rajeev Upadhyay

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