Need of the hour is to focus on supply-side reforms, says RBI

 Says policy support for sustained, inclusive recovery may be needed for longer

The need of the hour is to focus on supply-side reforms and easing various bottlenecks and disruptions, rather than focusing single-mindedly on normalization, the Reserve Bank of India (RBI) said in its State of the Economy report in its October bulletin.

The central bank also said policy support for a sustained and inclusive recovery may be needed for a longer period, emphasizing that it will continue to support growth going forward, taking comfort in the fact that softer-than-expected food prices have eased headline inflation into a closer alignment with the target.

“On inflation, the MPC’s call has turned out to be correct, with the softer-than-expected food prices...,” the RBI said.

“Perhaps the need of the hour is not to focus so single-mindedly on normalization but on supply side reforms to ease the bottlenecks and disruptions, labour shortages and high commodity prices, especially of crude,” the RBI said.

It added that everywhere, resurgent demand is being choked by supply bottlenecks, placing the global recovery at risk. In fact, supply chain disruptions seem to be feeding on one another, amplified simultaneously by decarbonisation drives and trade wars.

The RBI is of the view that while the Indian economy might be healing, it is still digging out of one of the deepest contractions to hit any major economy during the pandemic. Hence, policy support for a longer period may be needed for a sustained growth. “In the second wave, we did not impose a nationwide lockdown, but daily infections at over 400,000 were at that time the highest in the world and it clearly moderated the recovery that was underway till then. Consequently, policy support for a sustained and inclusive recovery may be needed for longer,” the central bank said.

In its latest monetary policy review, the RBI kept policy rates unchanged but decisively moved to withdraw excess liquidity from the system through its least disruptive liquidity management tool. However, it did say that the stance would remain “accommodative” for “as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy”.

The RBI had also said that it would no longer commit to buying secondary market bonds under its government securities acquisition programme, through which it has injected Rs 2.2 trillion of liquidity in the system, and would absorb a higher quantum of liquidity gradually through its 14-day variable rate reverse repo (VRRR) auctions. VRRRs would reduce the surplus liquidity to Rs 2-3 trillion by the first week of December, in what could be considered as the first step towards normalisation of the RBI’s ultra-loose monetary policy.