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-Rajeev Kumar (Editor-in-chief)

Friday, February 5, 2021

Predictably running to stand still (The Economic Times)


Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.


Monetary policy has run fast to stand still. Policy rates remain static and the stance of monetary policy would stay accommodative to support much-needed economic recovery. The Reserve Bank of India estimates that even as growth accelerates in the coming fiscal to 10.5% in real terms, consumer price inflation would stay well below 6%, the upper bound of the central bank’s comfort zone for inflation. This, despite the hardening of crude and commodity prices across the world. There is, however, no conflict between rising input costs and expectation of low inflation in a context of rapid economic growth. This has to do with vast unutilised capacity across the board.


In India, capacity utilisation is well below 70%. Rise in prices would trigger increased output. That goes for commodities as well. Crude prices are soaring because of production cuts by Saudi Arabia. If America under President Biden revives the Iran nuclear deal, as Tehran desperately wants to, lots of additional oil would come into production. Commodity prices are rising because, in part, of scarce shipping capacity. The pandemic-stricken global logistics industry has cut back on operational fleet capacity. Locked-down production in the world outside China has made it unnecessary for cargo ships to travel to China, laden with normal exports. This has resulted in Chinese output, robust enough in its domestic production, not being able to be shipped out of China. These kinds of restrictions on supply would ease, with vaccination’s progress. The prospect of supply restrictions easing would take out the speculative layer in commodity prices, forcing them down. It makes eminent sense for the central bank to look through these price changes.


Giving direct access to retail investors to government bonds is a major step forward. At a time when retail investors are clueless as to where to put their savings, direct access to the safest instruments possible would be of great help, particularly for things like inflation-adjusted bonds targeted at senior citizens.


Courtesy - The Economic Times.

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Help Sampadkiya Team in maintaining this website

इस वेबसाइट को जारी रखने में यथायोग्य मदद करें -

-Rajeev Kumar (Editor-in-chief, Sampadkiya.com)

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