June 10, 2023

RBI Maintains Status Quo On Policy Rates, Doesn't Suck Out Excess Liquidity

By Ashwini Agarwal
First publised on 2020-12-07 08:26:03

About the Author

View all posts by this Author

How times have changed! An economy battered by the slowdown in demand and the pandemic-related disruption has brought about a sea change in the outlook of the Monetary Policy Committee (MPC) of the RBI. Despite inflation that has not been tamed for more than four months now, the MPC has decided to hold policy rates in December. Earlier, inflation was the main benchmark and keeping it at or below 4% (+/-2%) was the mantra. But now things have changed. Neither has the RBI changed the policy rates nor has it taken extreme steps to suck out excess liquidity in the market to tame the inflationary tendencies that show no signs of abating.

Treating inflation as a direct result of supply-side bottlenecks, the MPC is of the opinion that the constraints need to be removed and this can be done only by keeping an accommodative stance in the near term, maybe the rest of this financial year and the first quarter of the next. It has also ensured that growth is not restricted due to non-availability of funds by announcing a series of measures to extend long-term credit availability for stressed sectors. This is most welcome.

In the absence of the long-awaited investment by the Centre in infrastructure projects, the economy has been left to its own devices to find the pre-Covid growth level. It can only be done if demand picks up. If the RBI were to suck out excess liquidity at this juncture, demand will drop further. Handholding of stressed sectors is as necessary as it is of sectors that are showing signs of strong revival. Liquidity can be sucked out as and when demand overtakes supply and the RBI has in-built mechanisms to flag such a situation and take corrective measures.

The RBI's stance is going to boost the sentiment and is likely to encourage entrepreneurs to set up new projects or expand existing ones. Demand is also likely to pick up in the next quarter as vaccines make an appearance and the people pick up the pieces of their lives post the pandemic. There is encouraging news on the hiring front as tech companies have picked up employees from the campuses at good salaries. Small businesses are also showing signs of making a comeback. Only the core sector needs a push and government investment in infrastructure is the key to that. If the stir by the farmers does not escalate into an ugly and debilitating fight, there are all signs that the economy will recover fast.