While monetary policy specialists may debate about the "accommodative" nature of RBI Governor Shaktikanta Das's statement on Wednesday, only three things are of immediate relevance for the ordinary people.
One is that inflation (read price level) is going to remain at an elevated level of about 5% throughout this financial year. This means that households should prepare for a general increase in wages and prices of about 5%.
Secondly, interest rates for depositors are going to be increased by banks, sooner than later. For quite some time, savers have been getting low yields on their deposits. The average bank fixed deposit rate for one year has been about 5.35%. So if inflation remains at 5%, the returns may be negative for depositors.
In the wake of COVID-19, RBI had reduced the "repo" rate ( rate at which banks can borrow from RBI against Govt. securities in their possession) to make available funds to borrowers at cheap cost. Conversely, the rates for borrowers like those who are going to take home loans are going to go up.
The current repo rate of 4% is the lowest in recent history and the RBI has let it unaltered. But it looks like that this rate can move only in one direction from now — up. The "accommodative" policy which the RBI says it will persist with, only means that there will be enough money for banks to lend. The economic recovery that the country is targeting this year, with a growth of about 10%, will need bank loans. The RBI says it will ensure enough money to go around.
The third important message from the RBI is that it would like to see growth gaining momentum. The estimates for economic growth in FY 21-22 has been projected at 12% by the IMF but RBI sets it at 10.5%.
It is axiomatic that high growth is almost always accompanied by inflation though we can have inflation without growth.
For those who are interested in macro-indicators, the RBI’s monetary policy statement of yesterday indicates a willingness to do whatever it takes to "support and nurture" the Indian economic recovery. We have seen excellent coordination between Mint Street and North Block in tackling the fallout of the COVID-imposed negative growth.
Liquidity is assured for all, including State Governments like Kerala. The RBI has said it is going to implement recommendations of an advisory committee to increase the Ways and Means limit (Emergency credit available for State Treasuries) by about 46%. So the States will have enough money to spend. It is hoped they spend wisely!
As for economic growth, there are reports of what looks like a second coming of COVID-19 with some States resorting to localised and regional lockdowns. The RBI has said that this may affect growth calculations.
The other major risk is the high international commodity prices including the cost of Edible Oil imports. India imports edible oil worth nearly Rs 65,000-70,000 crore every year and palm oil prices have been ruling high. From about Rs 63 per kg for crude palm oil in the domestic market, the price has gone up to Rs 100/110 now. India imports palm oil, sunflower oil and soya oil.
Whether we eat a roadside dosa or chola bhatura or vada or branded biscuit or namkeen we shall be eating stuff made using oil which is not from India.
If the price of these edible oils, pulses and of course petroleum/diesel remain elevated, inflation pressures will remain elevated.
The Government of India and RBI realise this. For economic recovery to happen, the Government has to do the heavy lifting by spending on infrastructure building like NH roads and rail lines, apart from other physical infrastructure. This will impart the momentum for other sectors of the economy to do well.
But we need to remember that even now, capacity utilisation by industry is only about 67%. Conventionally, fresh investment in capacity will be planned by companies only if capacity utilisation reaches at least 75%.
The RBI Governor said today that "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. 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."
So the effort for now is to stoke economic growth, keep enough money supply for this available so that India becomes the fastest growing economy in the world by March 2022. That would be quite an achievement. And it looks possible if Covid’s second wave can be contained through vaccination and people across the country take the Government-advised precautions.
(S Adikesavan is a Chief General Manager of State Bank of India working out of Thiruvananthapuram. Views are personal)