Saturday, February 13, 2021

Growth to Drive the Monetary Policy in Indian Economy

Reserve Bank of India (RBI) assesses the prevailing economic conditions as well as the outlook along with the liquidity position in the Indian economy at an interval of two months in its bimonthly meeting of the monetary policy committee (MPC) to formulate the monetary policy for the economy. The meetings of the monetary policy committee are held at least four times in a year and its decisions are published after every such meeting.

The MPC in its recent meeting has decided to keep the benchmark policy repo rate unchanged at 4 percent despite the fact that the rate of inflation has remained above the upper threshold of 6 percent continuously for six months before CPI inflation falling to 4.6 percent in December 2020 due to sharp fall in the food inflation; however during the same period the core inflation largely remained on higher side of the threshold. The resolution of the meeting mentions that there remains the risk of elevated core inflation in the coming quarters. RBI has projected the CPI inflation of 4 percent within a band of +/- 2 percent with the confidence interval of 50 percent and expects it to remain around the upper threshold of 6 percent in short term (RBI, 2021). This clearly signifies that there are high possibilities of elevated levels of CPI in the coming months.

On the growth front, the central bank has found some strong signs of the recovery in the service sector through high frequency indicators along with a resilient agriculture sector from the first advance estimates of GDP for 2020-21 published by the National Statistical Office (NSO). The GDP growth rate for the fiscal year 2021-22 has been pegged at 10.5 percent however it is lower than the IMF projections of 11.5 percent for 2021 (IMF, 2021). The higher projections by IMF and other institutions indicate that there is optimism in the environment about the Indian economy and the economy needs policy support (fiscal and monetary both) to continue the recovery and growth process.

Considering the prevailing levels of prices in the economy as well as growth outlook, the MPC has decided to continue with the accommodative policy stance till as long as it is necessary for the sustained and secure recovery and growth in the economy as the CPI inflation for the last quarter of 2020-21 is expected to remain 5.2 percent and is expected to remain in the range of 5-5.2 percent in first half and 4.3 percent in the third quarter of the fiscal year 2021-22.

From the monetary policy statement, it is clear that the growth will continue to drive the monetary policy for next few quarters. Cheap money will continue to be available in the market. As a result, it will keep the borrowing cost low for the government as well as businesses and consumers and would drive investments in the economy.

However, despite the low interest rates and the large surplus in the systematic liquidity, the credit growth has been relatively slow in comparison to the previous periods. The non-food credit growth has been very low. Also the private investment in the economy is yet to pick up. These hard facts about the economy clearly indicate the sentiments of the people about the recovery and growth prospects are not very strong and the investors and businesses prefer to wait. Perhaps, considering the international experiences, the risk of another wave of coronavirus infections might also be playing an important role in the decision making about the new investments in the Indian economy.

The budget of this year is aligned to the Atmanirbhar Bharat Abhiyan and has provided provisions for continued growth in the economy (Upadhyay, 2021). But there is a need for the high growth in the non-food credit for the increased economic activities. This will happen only when the people's (investors, businesses and consumers) confidence in the economy improves further. Perhaps this is one of the factors for the MPC to continue with an accommodative policy stance. It must also have to be noted considering the building up cost push pressure in the economy due to increasing inflation (both core and consumer) that MPC cannot continue with this accommodative policy stance for very long. It has to increase the policy rates to tame the inflation in coming months if the government fails to control the fuel prices in the economy. A look at the CPI basket gives a clear glimpse about the dual role of the petroleum products in consumer inflation.


  • IMF. (2021, January). World Economic Outlook Reports. Retrieved from IMF:
  • RBI. (2021, February 5). Monetary Policy Statement February 3-5, 2021. Retrieved from RBI:
  • Upadhyay, R. K. (2021, February 3). Budget 2021-22 . Retrieved from The Deliberation:
- Rajeev Kumar Upadhyay

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