In the face of persistent inflationary pressures and tie-in prices, the Reserve Bank of India has once again jacked up the repo rate by 40 basis points to 5.4% on Friday. With this hike, the RBI policy rate now reaches what it was before the pandemic started. This is a landmark that can be viewed as the complete normalisation of its monetary policy from the ultra-accommodative stance adopted in the wake of the pandemic. From the early stages of the pandemic incidence in India, RBI followed a policy that was more engaged in maintaining the tempo of the Indian economy against the severely contracting impact of the pandemic. It may be recalled that for one quarter after the pandemic hit in the initial stage, the Indian GDP had shrunk by a quarter. For a whole year, the GDP had fallen and its performance diverged from the long-term growth path. It thus needed a kind of nursing before the economy could get up on its feet.
Has the Indian economy then recovered from the adverse effects of the pandemic so that the RBI could reverse its accommodative monetary policy stance? In a way, yes, going by the optimistic note struck by the RBI Governor while announcing the monetary policy. The Reserve Bank estimates growth in the first quarter of the current fiscal at 16.2%, dipping to 4 percent by the fourth quarter, with growth for the whole year at 7.2% for 2022-23. In April RBI cut the GDP growth projection for 2022-23 to 7.2% from its earlier forecast of 7.8%. Governor Shaktikanta Das, however, stuck a line of caution saying that the continuing Russia-Ukraine war could yet weigh down the prospects. At any rate, he did not have any reason to further revise the growth prospects at this point. The overall projections for the economy pivot around the most unpredictable factor: the nature of the monsoon and its incidence. So far, the monsoon has been 6% above the long-term average. However, its incidence and intensity do matter a lot, as well as the spread of rains. So far, there have not been any untoward trends and RBI thus sets the farm sector growth at an even keel. Further, high-frequency indicators of activity in the industrial and services sectors were holding up. Production and sales of consumer durables are rising and the manufacturing sector has hit high levels of capacity utilisation, according to the Reserve Bank’s surveys.
The RBI also expects the activity in the contact-intensive services sectors, like tourism and IT services, to rise in the wake of overall improvement in economic activity. Since these segments are the drivers of the economy, the growth prospects would brighten with their gaining strength. What is most encouraging is that foreign direct investment flows at USD 13.1 billion were higher compared to USD 11.6 billion at the same time last year. On the other hand, the monetary policy stance of the US Fed, and its decisions to hike or lower interest rates would drive the flow of capital across the world. That may set turmoil in the global financial markets, as we have often witnessed. In his sphere at least, RBI must place a buffer for India in the coming days of global uncertainties.