There remains a “considerable slack” in the economy and therefore supporting growth is desirable at the moment, feels Reserve Bank of India Governor Shaktikanta Das, as the minutes of the recently held monetary policy committee (MPC) meeting released by the central bank show.
The RBI MPC met between August 4-6, and unanimously left the benchmark Repo rate unchanged at 4 per cent. It also maintained its “accommodative” policy stance, even as retail inflation had trended above the upper end of RBI’s target zone of 2-6 per cent in May and June.
India’s retail inflation in July eased to 5.59 per cent, compared with 6.26 per cent in June. The inflation numbers for the last month were released days after the RBI MPC meeting. Das believes the resurgence in inflation since the June 2021 MPC meet was driven largely by adverse supply-side issues due to multifarious disruptions caused by the COVID-19 pandemic. He felt many of the current price shocks are likely to be one-off or transitory.
“On the whole, the economy still requires support in terms of maintaining congenial financial conditions and fiscal boosters. At such a critical juncture, can we really pull the rug and let the economy tumble,” he questioned.
He feels the need of the hour is two-fold, “continue the monetary policy support to the economy; and second, remain watchful of any durable inflationary pressures and sustained price momentum in key components so as to bring back the CPI (consumer price index) inflation to 4 per cent over a period of time in a non-disruptive manner.”
The COVID-19 pandemic has had a huge impact on the economy over the last one year. India’s GDP growth shrank 7.3 per cent in the year-ended March 2021. The RBI expects it to grow 9.5 per cent in the current financial year. However, uncertainty remains. Many states went into a lockdown in April and May as the brutal second wave hit and it had an impact on the economy. While demand has been recovering now, a possibility of a third wave could yet disrupt things.
“Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment,” said the Governor.
All the MPC members voted in favour of keeping the Repo Rate on hold in the meeting. There however, seemed to be differences creeping in on maintaining the “accommodative” stance, with Prof. Jayanth Varma against it.
“As the pandemic continues to mutate, it appears to me that the balance of risk and reward is gradually shifting, and this merits a hard look at the accommodative stance,” he said.
He has also batted in favour of normalising its interest rate corridor (the gap between the Repo Rate and Reverse Repo Rate). As the pandemic hit last year, the RBI slashed the Repo rate (the rate at it which lends banks) to 4 per cent and the reverse repo rate (the rate at which it borrows from banks) to 3.35 per cent. Varma felt a gradual normalisation of the corridor was warranted.
“By creating the erroneous perception that the MPC is no longer concerned about inflation and is focused exclusively on growth, the MPC may be inadvertently aggravating the risk that inflationary expectations will be disanchored,” said Varma.
All other MPC members continued to favour the accommodative stance. Yet the expectation is that the central bank could slowly start tightening the easy money policy.
“Whenever normalisation starts, it should be very gradual and aligned to growth recovery and inflation paths. Since stance affects only repo rate actions, other normalisation can start even in an accommodative stance,” said MPC member Ashima Goyal.
In the MPC meet, the RBI did announce measures to mop up the excess liquidity in the system through four fortnightly variable reverse repo rate auctions, which analysts saw as nascent attempt to normalise the monetary policy.
The wider expectation is that the central bank is unlikely to raise interest rates in 2021. However, there could be some reversal in the policy next year.