A monetary policy that strikes a chord with fisc

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A monetary policy that strikes a chord with fisc

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• RBI and Centre relationship: Normally, RBI support's Centre's fiscal stance, and that was so in the Feb 2021 MPC review also. It confirmed that an accommodative stance will be maintained for another year, and liquidity won't be found wanting. Recovery is the goal.
• From RBI to fisc: In 2020-21, the heavy lifting was done by the central bank, and now it is the turn of the government (the fisc) to do so. Many new spending and structural measures in Budget indicate so. RBI will keep lending support.
• Micro aspects: The policy Repo Rate was kept at 4%, as expected. In January, the RBI had conducted reverse repo worth Rs.2 trillion, to absorb liquidity. So was it to end its ultra loose liquidity policy? The Feb review says "no". Short term interest rates are close to the reverse repo rates now. And G-sec markets too are calm right now, so govt. borrowing for H1 2021-22 is not a worry (not much credit growth).
• Inflation the good boy: Inflation rate had calmed a lot, due to low food inflation. Hence, CPI inflation for 2020-21 Q4 is just 5.2%, and unless there's a huge cost-push pressure in services and mfg. prices there won't be much rise in H1 of 2021-22 either.
• GDP growth: RBI thinks that real GDP growth rate for 2021-22 would be 10.5% only (not 11% as per Budget). Govt. feels that its large revenue and capital spend in 2021-22 will lead to fresh private sector investments, leading to higher credit growth (immediately or later). Hence RBI will keep liquidity tap ready (for borrowers).
• Market operations of RBI: The local money markets, forex markets and G-Sec markets are calm, since 2020. Why so? Because the RBI has intervened heavily. That also attracted FPI worth $30 billion into India (in 2020-21). {But the RBI hasn't explained its strategy while intervening in these markets, for some policy goals}
• Observations: Experts find that RBI's assets in terms of forex versus domestic haven't changed much, since 24 months now. Had it changed a lot, tumult would arrive in the rupee value and long-term inflation outlook. But still, what policy and strategy RBI is using to buy huge chunk of forward US dollars is unknown.
• On INR: Perhaps the RBI wants to not allow the INR to appreciate, in nominal or real terms, and to stagger over many months the rupee liquidity that gets created due to dollar purchases. This is so as in Nov 2020, RBI's forward buying position on dollar as $38.5 b more than in April 2020. {the cost in this strategy is the huge risk in forward positions, due to valuation losses, for the RBI}
• CRR: RBI reimposed the 1 % cut in CRR, via two equal instalments (March and May 2021). This is similar to the 14 day reverse repo idea.
• Helping the NBFCs: Banks are now allowed to use liquidity from T-LTRO-on-tap to lend to NBFCs so they can lend to stressed sectors.
• Yield curve: The RBI has explicitly said that it will maintain and help evolve the yield curve in an orderly manner, as a public good that benefits all stakeholders. (which is actually the government!)

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