There is no doubt that the economy remains at risk. The biggest problem is the inability to catch the pace of private investment. Private consumption is also not increasing. The main reason for this was the huge decline in the income of people in the last two years. The employment situation is grim in most sectors except a few sectors like IT. Obviously, people don't have money to spend.
With no change in policy rates for the tenth time in a row, the Reserve Bank's Monetary Policy Committee (M.P.C) has made it clear that its priority is to accelerate growth. This move of MPC is shocking because this time from the market to the industry, the policy rates were expected to increase. Then, for some time now, the Reserve Bank has also been giving such indications that now that the economy has started recovering from the crisis and the situation is on the way to normalcy, it is not possible to keep the policy rates at the lowest level for a long time, nor is it possible.
But this time also, there is no change in the repo and reverse repo rate, it is a clear indication that the economy is still not able to come out of the environment of uncertainty. The threat of a pandemic is not over. The expected growth in the economy is not being seen. Therefore, even in the proposed budget of 2022-23, the emphasis of the government has been on those measures, which can accelerate the infrastructure sector and create employment opportunities. Clearly, in such a situation, the Reserve Bank was not in a position to take the risk by raising the policy rates.
The main reason behind not changing the policy rates is that commercial banks should not increase rates and loans remain cheap. The government's emphasis is already that banks should be liberal in lending, so that economic activities can accelerate. Now it will happen that banks will not be able to increase interest rates. The loan will remain as cheap as before. But the problem is, why would people or industries who used to avoid taking loans till now give priority to it? However, the one who needs it is forced to take a loan.
Therefore, the Reserve Bank's belief that non-raising policy rates will keep credit cheap and this will help in accelerating economic activity, does not seem plausible. Most people and investors have turned to the stock market due to banks not raising interest rates. There is also no less population who has been keeping their money in banks in the form of fixed deposits. The income of such people has been hit hard due to low interest rates for a long time.
The lack of improvement in the condition of the service sector is telling the crisis. The Monetary Policy Committee has projected GDP growth for the next year at 7.8 percent. For the current financial year, the estimate has been reduced from 9.5 percent to 9.2 percent. The Reserve Bank is also aware that it is not easy to accelerate the market in the current situation. Then inflation is adding fuel to the fire. At the moment there is no hope of getting rid of it. In such a situation, what else is left with the Reserve Bank except adopting an accommodative stance!