The Reserve Bank of India (RBI) has cautioned that premature tightening of the monetary policy could bring about the stagflation — slow growth and high level of unemployment and inflation — that “all fear, quashing growth just as the economy is recovering”. “Consequently, policy support for a sustained and inclusive recovery may be needed for longer,” RBI said in its ‘State of the economy’ report.
This is because the economy may be healing but it is still digging out of one of the deepest contractions to hit any major economy during the pandemic. “We were among the first hit and our recovery started late, towards October-November 2020. In the second wave, we did not impose a nationwide lockdown, but daily infections at over 400,000 were at that time the highest in the world and it clearly moderated the recovery that was underway till then,” the RBI report said.
On unwinding of the accommodative monetary policy, RBI Governor Shaktikanta Das had said on October 8, “This process has to be gradual, calibrated and nondisruptive, while remaining supportive of the economic recovery.” The potential liquidity overhang amounts to more than Rs 13.0 lakh crore, he said while unveiling the monetary policy.
“In an influential view, history is thick with examples of central banks under doing it — underestimating the need for continuing stimulus,” the RBI said. Perhaps the need of the hour is not to focus so single-mindedly on normalisation but on supply side reforms to ease the bottlenecks and disruptions, labour shortages and high commodity prices, especially of crude, it said. Going forward, the focus is likely to be on the normalisation of prudential policies and the strengthening of insolvency frameworks and restructuring mechanisms, including for the overhang of public and private debt, the report said.
On October 8, the RBI kept key policy rates unchanged for the eighth time in a row and decided to “continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis”. However, the central bank decided to discontinue the government securities acquisition programme (G-SAP).
Amidst an accentuation of global risks, the Indian economy is picking up steam, although the recovery is uneven and trudging through soft patches, the RBI said.
“The step up in vaccination, slump in new cases/mortality rates and normalising mobility has rebuilt confidence,” it said. Domestic demand is gaining strength while aggregate supply conditions are recouping, powered by the robust performance of kharif agricultural production and revival in manufacturing and services. “Softer than expected food prices have eased headline inflation into a closer alignment with the target,” the RBI report said.
“With signs of the second wave abating and mobility and activity returning towards normalcy, the Indian economy is picking up steam, although the recovery is uneven and trudging through soft patches,” it said. With the festive season setting in and offices opening up, the Google and Apple mobility indices have recorded growing footfalls in September-October.