Why the RBI cannot stop digging.

The Monetary Policy Committee (MPC) of the Reserve Bank (RBI) kept repo rate unchanged at 4% at its meeting yesterday, moneycontrol. The repo rate sets the base for interest rates in India. "The RBI also downgraded the GDP growth forecast for FY22 (financial year) to 9.5 percent compared with 10.5 percent earlier." "The panel has projected the retail inflation at 5.1 percent -- within the RBI's inflation band of plus/minus four percent -- during 2021-22," wrote George Mathew. "It has decided to conduct another operation under G-SAP (government securities acquisition programme) for purchase of G-Secs of Rs 40,000 crore (Rs 400 billion) On June 17, 2021," The Indian Express (TIE). "During the current year so far, the Reserve bank has undertaken regular open market operations and injected additional liquidity to the tune of Rs 36,545 crore (up to May 31) in addition to Rs 60,000 crore under the first G-SAP." "Without saying so, the RBI has embarked on quantitative easing (QE)," wrote Ajit Ranade. "For now, RBI says that the GSAP promise is to buy Rs 1 trillion worth of government securities in the secondary market in the first quarter of this fiscal year," Mint. "Even though this is not outright monetization of the deficit, it amounts to that." "What low rates can do is inflate asset markets, especially stocks and housing." "India Inc on Friday said it is looking forward to a repo rate cut in future as cost of funds has to come down in coming times, and expects continuation of accommodative policy stance by the RBI," Economic Times (ET). They say that because they increase their wealth at the cost of ordinary people who suffer from rising costs. The Bombay Stock Exchange (BSE) index the Sensex closed at 52, 232 on Thursday, very close to its all-time high of 52,526," Times of India (TOI). The BSE Midcap and Smallcap indices also rose to near record levels, so that, "As a result investors' wealth, measured by BSE's market capitalisation too settled at a record peak at nearly Rs 229 lakh crore." No wonder the fat cats (Investopedia) want the RBI to provide almost free money so that their wealth continues to boom. Meanwhile, at the bottom of the wealth pyramid, "If the information we are getting from rural areas is any indication, we may start seeing consumer price inflation starting to inch northwards. Not inch, maybe even speed northwards," said Pronab Sen to ET. "Why isn't India's stock market falling more," asked Andy Mukherjee on 7 May after a slight correction in the markets. Because, "investors know from the first wave in 2020 that firms will protect earnings by idling operations and firing workers if required", and "the finance ministry and central bank might come together to offer moratoriums, state-guaranteed loans and other liquidity-enhancing measures to make up for disappearing cash flows. Sure enough the RBI on Wednesday announced repayment relief, as well as Rs 50,000 crore (Rs 500 billion) in three-year funding at its policy rate of 4% for banks to extend to vaccine makers, hospitals and oxygen suppliers," Mint. "Headline retail inflation has been relatively benign in recent months, but core inflation has been persistently high over the past few months. Even the headline numbers could start rising as commodity prices get passed on to consumers, and pandemic-induced supply disruptions in rural markets drive up prices of food items," wrote Prof Puneet Kumar Arora. Last month, the RBI said "that runaway inflation has emerged as a major impediment to further monetary policy by the bank to stimulate economic growth", Hindustan Times (HT). One week back, the RBI "warned of a bubble in the stock market as the gap between the real economy and the prices of financial assets have been widening", TOI. This is what Federal Reserve Chair Alan Greenspan called "irrational exuberance" in 1996. But, perhaps not so irrational in the case of our markets. They know that the market cap has become a handicap for the RBI. The market is drawing in huge amounts of foreign exchange so that the RBI is buying dollars to keep the rupee from becoming too strong. If it raises interest rates the market could collapse, foreign investors would sell out, the rupee will fall and inflation will zoom out of control. It knows it is in a hole but it cannot stop digging. It may end up burying the economy.