The Reserve Bank of India has switched its focus to fiscal policy

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by Shaun Richards

Today’s economic diary began early as we look East to India.

The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent. ( Reserve Bank of India )

The first thing to note is that India has resisted at least to some extent the trend to ZIRP and interest-rates of 0% and in some cases below. I also note that for India the rate cuts began back at the opening of 2015 when the repo rate was cut from 8% to 7.75% so interest-rates have halved. There was one solitary rise in June 2018 which lasted until spring next year. That is a theme of the times where the rise totalling 0.25% got swamped by cuts of 4%. As to the Covid-19 pandemic then it has seen cuts of 1.15% which were completed late May last year.

The Economy

Last year like in so many places saw a fall of depression size.

The National Statistical Office (NSO) in its update on February 26, 2021 placed the contraction in real GDP at 8.0 per cent for 2020-21.

With India’s many poor this sends out an especially concerning issue as we recall the impact on them of the demonetisation issue in late 2016. For those unaware 500 and 1000 Rupee notes which were some 86% of the cash in circulation were withdrawn and then replaced.

The RBI is optimistic for this year based on two main reasons.

Public investment in key infrastructure sectors is a force multiplier with historically proven ability to revive the broader economy by directly enhancing capital stock and productivity, and by attracting private investment. The focus of the Union Budget 2021-22 on investment-led measures with increased allocations for capital expenditure; the expanded production-linked incentives (PLI) scheme; and rising capacity utilisation (from 63.3 per cent in Q2:2020-21 to 66.6 per cent in Q3:2020-21) will reinforce the process of economic revival.

That is like something from the textbooks I studied back in the day as we find ourselves returning to talk of multipliers. Next comes business confidence.

In fact, firms engaged in manufacturing, services and infrastructure sector polled by the Reserve Bank in March 2021 are optimistic about a pick-up in demand and expansion of business activity into financial year 2021-22.

The combination leads them to forecast this.

Taking these factors into consideration, the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1; 8.3 per cent in Q2; 5.4 per cent in Q3; and 6.2 per cent in Q4.

There is a bit of a bipolar addition to it all as we have the good.

 Prospects for 2021-22 have strengthened with the progress of the vaccination programme.

But then the much less sure.

The recent surge in infections has, however, imparted greater uncertainty to the outlook and needs to be closely watched, especially as localised and regional lockdowns could dampen the recent improvement in demand conditions and delay the return of normalcy.

The International Monetary Fund did produce some updates on India yesterday and it was more upbeat than the RBI as it forecast growth of 12.5% this year. Actually if we look at their webcast they seem to be even more optimistic.

So, in the case of India, we have a pretty small change. It’s 1 percentage increase for growth for 2021. This came in with high frequency………..Just to add that the current forecast that we have already takes a fairly conservative view on the sequential growth for the Indian economy for this for this year.


I know it is rather unfashionable in central banking circles to worry about inflation ( unless you are trying to get more of it) but with its large number of poor food inflation in particular is a big issue in India. We see if we look at the numbers one way of policy being described as “accomodative”

While headline inflation at 5.0 per cent in February 2021 remains within the tolerance band, some underlying constituents are testing the upper tolerance level.

So the repo rate is below inflation but as you can see below forecasts for it.

Taking into consideration all these factors, the projection for CPI inflation has been revised to 5.0 per cent in Q4:2020-21; 5.2 per cent in Q1:2021-22; 5.2 per cent in Q2; 4.4 per cent in Q3; and 5.1 per cent in Q4, with risks broadly balanced.

It is also above target although within the wider band.

 On March 31, 2021, the Government retained the inflation target at 4 per cent with the lower and upper tolerance levels of 2 per cent and 6 per cent, respectively, for the next five years (April 2021-March 2026)

The good news from the inflation data is that it is not being led by food inflation which is at 4.25%. As ever there is wide variation with oils and fats at 20.8% but those with a sweet tooth would have been pleased to see a 0.7% drop in sugar and confectionery. The whole sector is 45.9% of the index which gives a clue to its significance.

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Onion prices have been mostly helpful recently.

These steps, along with fresh arrivals, led to onion prices
moving into deflation during November 2020-January
2021. Onion prices picked up again in February
2021, however, due to drop in arrivals on account of
unseasonal rainfall in January 2021 in Maharashtra.  ( RBI)

The last bit comes with a reminder that many food prices are under the control of the weather rather than monetary policy.


This has weakened so far today by one Rupee versus the US Dollar to 74.5 as I type this. That is in line with the broad trend which involves the Rupee slip-sliding away over time although annual comparisons are positive right now because pandemic fears pushed it to 77 last spring.


So far today I have looked at conventional views of monetary policy but these days central banks have moved into the fiscal sphere as well. According to the Economic Times of India borrowing has been as below.

NEW DELHI: The government will borrow Rs 12.05 lakh crore from the market in 2021-22, lower than the Rs 12.80 lakh crore estimated for the current financial year……..The Budget has pegged fiscal deficit at 6.8 per cent for the next fiscal, down from 9.5 per cent of the GDP in the current financial year.

The RBI will do its bit to help with this.

Under the programme, the RBI will commit upfront to a specific amount of open market purchases of government securities with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions……..For Q1 of 2021-22, therefore, it has been decided to announce a G-SAP of ₹1 lakh crore.

Investments Eh?

In addition, the extension of Held-to-Maturity (HTM) dispensation opens up space for investments of more than ₹4.0 lakh crore.

Time for some Orwellian doublespeak too.

While laying out the liquidity management strategy for 2021-22, let me unequivocally state that the Reserve Bank’s endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof.

If it is going to be “governed by fundamentals” why are you buying so much and I think we know what “orderly evolution” means! The present ten-year yield is close to 6%.

Meanwhile as we note the economic contraction we see that the response has also been to sing along with “Money Money Money” by Abba.

Reflecting the surplus liquidity, reserve money rose by 14.2 per cent(YoY) as on March 26, 2021 driven by currency demand, while money supply (M3) grew by 11.8 per cent (YoY) (as on March 26), with bank credit growth at 5.6 per cent (YoY) (as on March 26).



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