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Yesterday the Reserve Bank of India'’s monetary policy committee voted unanimously to keep the policy rate unchanged at 5.15%. This wasn’'t surprising, given that the retail inflation in December was 7.4%, overshooting the outer bound of 6% fixed by government as part of the flexible inflation targeting regime. However, the policy statement when seen in conjunction with other steps announced by RBI suggests that reviving economic growth remains the priority. This is also unsurprising after six consecutive quarters of deceleration in growth and a Union Budget that is unlikely to catalyse a revival.

RBI has revised its inflation projection for April-September to 5.4-5%, higher than its earlier projection of 4-3.8%. An increase in inflation however doesn'’t seem to be worrisome. The bigger challenge is that even when economic growth is forecast to increase to 6% next fiscal, the monetary policy committee observed that the “"economy continues to be weak”". This is the case even though there has been a significant transmission down the line of the 1.35 percentage point reduction in policy rate over the last year. The reduction in interest rates was complemented by accommodative liquidity conditions. Yet, bank credit growth is around 7%, a shade lower than the economic growth.

RBI is now using a different set of tools to revive the economy, with special emphasis on a handful of sectors. Regulatory dilution of bad loan recognition norms of MSMEs in default will be extended. This will keep bank funding to some firms flowing but carries risks. Separately, there are other measures to incentivize credit flow to MSMEs, real estate and auto sectors. Another monetary tool, long-term repos, are to be used to offset the depositor pushback against the relentless reduction in interest rates. When viewed as a package, RBI is now going well beyond the interest rate channel to catalyse economic growth.

The big question is how effective will these measures be? The Budget suggested that government has nothing left in the fiscal toolkit to revive growth. Monetary policy has picked up the burden. But this is unlikely to make a meaningful difference at this stage. A lot of risk aversion in the economy has to do with structural bottlenecks in different sectors, particularly real estate. This requires government to work with states to remove obstacles and create a more conducive and predictable environment for business. It is structural reform by another name. If RBI’'s steps are to bear fruit, government needs to do the heavy lifting.

What is the current priority of the RBI?

A) Revive economic growth

B) Contain inflation

C) Revive employment

D) Revive service sector to generate employment