- The aftermath of the pandemic has posed innumerable economic challenges to the whole universe burdened with debilitating effects courtesy suffocating restrictions needs no further elaboration. Every effort to safely navigate while encountering choppy waters has been met with further hurdles along the way as the successive Covid waves consistently put paid to resurrection efforts. It is disheartening to note that the entire humanity is continuing to live under the shadow of uncertainty as the proverbial Sword of Damocles hangs overhead. The new Covid variant of concern, Omicron, is already showing signs of devastating the world yet again as it rages everywhere unhindered. Thus, expect any far-reaching economic decisions to become a casualty.
- The Indian Financial think tank headed by the Union Government and ably supported by the Reserve Bank of India is diligently pursuing efforts to ease the burden on the economy by coming out with monetary measures over the last eighteen months. As such, prevailing uncertainty arising from both global factors and the trajectory of the pandemic is influencing RBI’s monetary policy committee (MPC) meeting all along, and this month is no different as well. MPC’s minutes point to the growing complexity in economic policymaking and the need for synchronization of monetary and fiscal policies to insulate the economy from uncertainty and also provide policy support to an underperforming economy.
- As a consequence, it is reported that there is unanimity in the committee to keep the policy interest rate at the current 4%. As reported extensively, a sharp rise in inflation across many countries is the root cause for uncertainty stemming from global factors. On expected lines, this will play out in India too with RBI projecting average inflation in the January-March quarter to be around 5.7%, a level above the forecast of 5.3% for 2021-22. Mind you, supply disruptions as economies normalize and a rise in commodity prices, especially crude, pose the biggest challenge in India’s inflation scenario. The RBI is faced with dual challenges as mentioned below.
- While RBI has to deal with both domestic inflation and the possible turbulence in financial markets as major central banks adjust their policies, it also has to provide monetary support to economic revival. A tough task indeed as the MPC’s minutes show the committee is not yet convinced that the revival seen in the July-September quarter is durable and sustainable in the long run. Needless to mention, the economic scenario calls for close coordination between monetary and fiscal authorities. So far, the Indian approach has been to let monetary policy based on surplus liquidity and a low policy rate provide the primary boost to the economy.
- Nonetheless, uncertainty surrounding the evolving situation usually catalyses risk aversion among banks. Therefore, the fiscal policy envisaged may have to plug the gaps in some contact-intensive sectors that have not yet recovered despite efforts. Now, with Omicron appearing to slow down the process since several states have already begun tightening by imposing some restrictions, Government authorities may have to calibrate sound fiscal policy in the forthcoming budget to complement monetary policy. Hopefully, this will also provide RBI space to limit any turbulence on account of global uncertainty. Rest assured; the days ahead will be full of challenges.