In the aftermath of the Monetary Policy Committee’s February meeting, the debate among economists was whether or not it is time for the central bank to start guiding the market about its intention to eventually roll back the extraordinarily loose policy steps adopted in the middle of the pandemic in 2020.
The debate took place in the backdrop of government’s fiscal stimulus in the Budget and expectations that the economy will roar back in the second half of 2021 as various activities normalised due to accelerated vaccination.
Today, the stricter-than-expected restrictions in Maharashtra, a state that is leading the caseloads in the country, have brought into doubt expectations of double-digit economic growth.
“The sense of growth comfort seen in the last policy amid improving capacity utilisation and reviving consumer confidence would likely be reassessed in this policy,” Madhavi Arora, economist at Emkay Global Markets, said in a note.
The Monetary Policy Committee is expected to stand pat on the interest rate on Wednesday, but re-assert its “whatever it takes” commitment towards economic recovery and keeping liquidity ample.
RBI Governor Shaktikanta Das, at a recent event, had said he does not see a need for the central bank to revise down its 10.5 per cent GDP growth estimate for the current financial year. However, Arora reckons that the policy statement’s tone on growth will be concerning amid the new wave of Covid and localized lockdown.
Market participants will also parse through the rate-setting panel’s outlook on inflation given the uptick in Consumer Price Index-based inflation metric in February and continuous rise in global commodity prices from metals to agricultural produces.
“While disruptions in global supply chains and associated shortages are pushing input prices higher in the near term, pricing power with businesses still remains muted. As disruptions ease, the price pressure should also moderate,” said Edelweiss Securities in a note.
Market’s concerns over inflation, which were prominent in February and early March, have shifted towards further injury to demand in the economy because of the return of COVID-19 restrictions. Economists who were earlier concerned about the effect of loose monetary policy on financial stability at a time when the economy was expected to grow at more than 10 per cent, are now expecting crisis-time policy steps to stick around for longer.
“While economic recovery has been strong so far, we haven’t exited the health crisis yet. This has increased demand uncertainty particularly for high contact services in transport, culture and social space which were slowly moving towards normalcy,” said Prithviraj Srinivas, economist at Axis Securities in a note.
With Delhi announcing night curfews earlier today and the current pace of vaccination still not enough to inoculate a critical mass of the populace in time to re-open the economy fully, some are now expecting the government and the central bank to provide fresh relief to stressed sectors.
“For RBI the question is should it keep broader monetary conditions at crisis level or set an exit path and use specific measures to provide relief to targeted stressed sectors,” Srinivas said.
Either way, the central bank’s insistence that its extraordinarily accommodative monetary policy needed to stay for longer has been made much more palatable for investors because of the second COVID-19 wave.
