As RBI firmly backs government's growth push, common man's eyes will be glued to inflation control

The Reserve Bank of India’s Monetary Policy Statement, 2020-21 was spelt out by Governor Shaktikanta Das in the backdrop of an expansionary Union Budget announced days earlier.

In the Budget presented at the start of the week, Finance Minister, Nirmala Sitharaman promised to loosen the purse strings with a huge Rs 12 lakh crore plus borrowing programme for 2021-22 to support the massive spends on infrastructure and healthcare, among many other crucial sectors.

The government’s focus on growth means higher spending and consequently high fiscal deficit that has to be bridged by raising money by market borrowing.

It was now the RBI’s turn to take over. Das has in no uncertain terms backed the Finance Ministry’s plans by exuding confidence in executing the government’s borrowing programme in a manner that it will not disrupt the liquidity flow in the system.

The government would be happy with the RBI’s resolve at backing its plans. An ‘accommodative stance’ on interest rates would also mean that money will continue to be available for businesses at cheap rates, which in turn will power the economic engine further. But the common man would be more interested in the central bank’s action on controlling inflation.

The RBI has projected Consumer Price Index (CPI) inflation at 5.2% in Q4 of 2020-21 (the current quarter), 5.2% to 5.0% in H1 of 2021-22 and 4.3 per cent in Q3 of 2021- 22. While these are not alarming levels, market disruptions can spoil the game and the party.

The RBI will surely keep a sharp eye on inflation to ensure that it remains well below its tolerance threshold limit of 6%, which it had breached for six consecutive months between June and November 2020. High inflation levels would mean a prolonged period of negative real rates for debt investors in India. It will be a tough balancing act for the RBI to back the government’s resolve for growth and ensuring low inflation.

It will also be interesting to see the RBI’s detailed guidelines on its huge reform initiative to allow direct retail participation in government securities (G-Secs). Making India the first country in Asia and putting it in a select global club, the central bank’s initiative will provide retail investors online access to the government securities market, both primary and secondary, through gilt securities account directly with the RBI.

The G-Sec, or Gilts market, is an intricate one for common investors and the RBI might find it difficult to attract much interest initially. It has to consider ways to educate investors on how the market functions to ensure that investors can cut losses. With uncertainty on the interest rate front and possibility of higher rates in future, long-term G-Secs can be a risky investment instrument. Though credit risk is nil in such investments, many investors might not understand the interest-rate risk involved in debt instruments.

On another front, RBI’s announcement of a unified ombudsman scheme by clubbing three different such schemes operating in virtually the same (Banking, NBFCs and digital transactions) arena is a welcome step for consumers. However, the scheme needs to have a robust framework to ensure that aggrieved customers of financial products receive quick justice. Also, the RBI could do well to take a cue from the Union Budget announcement for faceless Income Tax appeals where consumers would be given the option of digital interaction to settle disputes.

It was heartening to see RBI jive along with the Union Government in their quest for economic growth to overcome the debilitating impact of Covid-19. When the two tango, it can only benefit the economy.

(Views expressed are personal)