MPC finds April too early for forward guidance play


Informist, Wednesday, Apr 7, 2021

By Siddharth Upasani

NEW DELHI - What was most watched out for in today's monetary policy decision was a forward guidance by the Monetary Policy Committee on how long it would continue with the current accommodative stance.

After six months of an unprecedented time-specific guidance that assured an accommodative stance for the second half of the year ended March and into the current financial year, perhaps expectations from Reserve Bank of India Governor Shaktikanta Das and his fellow committee members were rather high. But then again, circumstances are such that it was not outrageous to expect the committee to guarantee another six months of accommodation.

The Governor Is, Indeed, Correct.

At least Das has given some hope that an explicit guidance might make a reappearance by providing a guidance on the guidance itself.

"We are at the beginning of the new financial year. And it is too early in the day to again give a time-based guidance, especially when the environment has become more uncertain due to the recent surge in infections," Das said at the post-policy media briefing.

The governor is, indeed, correct. 

The resurgence of the coronavirus and the possibility of an adverse impact on economic activity--even though the RBI did not mark down its growth forecast of 10.5% for this year--from localised lockdowns have the potential to stretch the central bank in the coming months. Throw rising commodity prices and other global spillovers into the mix, and the RBI's task only gets tougher.

Keeping its powder dry would then be crucial for the RBI, especially when it is already providing some new tools in the form of the gilt acquisition programme, or 'GSAP 1.0'.

The RBI's toolkit has expanded appreciably over the last year-and-a-half, going from interest rates and reserve ratios to new varieties of communication, including signals, which Das referred to today. The RBI has also added new instruments to its arsenal, with the gilt purchase programme being the latest.

Whatever the modalities of the new gilt purchase programme, it will at least serve as a distraction for the market. And the RBI will be hoping this distraction will last until June and ensure bond yields evolve in an orderly fashion. For that is what monetary policy seems to be looking for: time.

At a time when inflation is high--but perhaps not as high that the Monetary Policy Committee is compelled to increase the repo rate--and the economy is on path of recovery, the RBI can only maintain the easy liquidity conditions and hope the vaccination drive, the private sector's animal spirits, and the government's measures coalesce to form an economic force that will lift the economy out of the lowest of troughs it is in.

Key to the revival of the economy is low gilt yields - or as Das has often put it, an orderly evolution of the yield curve.

The explicit forward guidance introduced in October helped keep bond yields low until matters took a turn for the worse in February, thanks to a mix of domestic and global factors. The gilt purchase programme, or at least its first version, seems to be the next arrow drawn by the RBI from its quiver.

Depending on how market conditions fare in Apr-Jun, the RBI will have a choice to make: whether to continue with 'GSAP 1.0', introduce version '2.0', or bring out a more familiar gun--a forward guidance on the stance.

Should the need arise, the committee could soothe frayed nerves by assuring the continuation of the accommodative stance until whatever time it thinks appropriate. A forward guidance to this effect can be introduced anytime. And as the experience from last year showed, such a guidance has the potential to help keep bond yields moving in an orderly fashion for several months.

In the meanwhile, the committee will continue to look through the elevated core CPI inflation, which it has judged to be driven by pandemic-related disruptions. And even though the RBI has raised its inflation forecast for the remainder of 2021 and sees it above 5.0% in the first quarter of 2022, the top priority is growth. As Das said, the aim is to ensure the prospects of sustained recovery are well secured.

To a query, Das said, April is too early for another time-based forward guidance. A more apt answer may have been that the RBI is rationing its instruments to buy itself, the government, and the economy as much time as possible. The central bank will be hoping for the best, but will be ready to use the tools at its disposal if needed.  End

Edited by Vandana Hingorani

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