Das’ and the current MPC’s tenure has been bogged down by one crisis after another. In February 2019, when Das took over the reins, India was slumping ever so deep into an economic abyss. And just when signs emerged of a recovery, it was plunged into the darkness by the Covid-19 pandemic and national lockdown last year.
In the three-year tenure of Governor Das, home loan rates have touched lows not seen in many years and bank deposit rates have sunk so low that savers have ended up getting crucified at the altar of economic growth.
But, the days of record low interest rate are most likely over, going by the tonality of the MPC’s August meeting last week. As much as the MPC believes that current high inflation is transitory and that growth in pandemic times should be the priority, the panel knows it risks losing credibility if it plays down inflation for too long.
The not-so-subtle recalibration of liquidity position through the increase in quantum of variable rate reverse repo was the first sign that the central bank knows it must slowly start turning off the tap of accommodation it has afforded the economy before things get out of control.
“The MPC faces a trade-off between growth and inflation, but if inflation remains elevated, as we expect, then these trade-offs are unlikely to disappear. If policy falls behind the curve, then inflation could drift much higher and monetary policy credibility could come into question,” Nomura Securities India said in a note.
RBI itself sees inflation rising in the coming quarters with 2021-22 inflation projected at 5.7 per cent, too close for comfort to the 6 per cent upper limit of its legally-binding inflation mandate.
Since the chances of repo rate sliding below 4 per cent appear slim, if not, extremely unlikely, the obvious question to ask is: when will the members of MPC be willing to raise the repo rate and change their policy stance?
Given the MPC’s current objective of nurturing “durable” growth in the economy, any lift-off in rates may depend on how quickly India will be able to partially insulate itself from the pandemic. That brings us to the ongoing vaccination problem.
Even after seven months, India has only fully vaccinated 10 per cent of its population. While the pace of vaccination has picked up since late June’s distribution revamp, it still remains lethargic considering the imminent threat of a third wave of Covid-19.
At current pace, reaching the herd immunity threshold of 60-70 per cent could take better part of the next year, which keeps the economy vulnerable to more lockdowns as and when the third wave strikes.
“Acceleration in the vaccination program and availability of health care would be a key to boost the confidence of the consumers, workers and producers in the resumption of their economic lives,” MPC member Dr Shashank Bhide had said at the June policy meeting as per the officially-released minutes.
A highly vaccinated population coupled with economic recovery on the ground should meet the conditions of the “durable” economic growth condition that the MPC has attached to its “accommodative” monetary policy stance.
Further, the rate-setting panel would prefer to see the credit pulse of the economy beating again after being sent to coma by the pandemic and the economic slowdown prior to that. Credit growth in the economy remains anemic and, if some of the private sector lenders are to be believed, the situation won’t change in the near term.
As and when the credit growth kicks-in, it will be the first sign of demand pull in the economy that the MPC believes is a more important consideration in inflation dynamics than temporary supply-led factors. “We expect the MPC to keep the policy (repo) rate unchanged at least until the June quarter of 2022 to ensure the economic recovery is secured, even if inflation overshoots the 4% target in the interim,” UBS Securities economist Tanvee Gupta Jain said in a note.
UBS India expects the MPC to change its policy stance by the end of the financial year and deliver the new lift-off cycle for the economy from the second half of next financial year.
All this, of course, would be contingent on the central bank being right in its assessment of inflation. RBI knows all too well the havoc high inflation causes when the central bank is left playing catchup.