Reserve Bank of India (Image: Shutterstock)
There is no rethinking among the members of the monetary policy committee (MPC) regarding a change in the current accommodative stance. In fact, the members are of the view that against the backdrop of COVID second wave, there is a fresh threat to the nascent growth recovery in the economy, suggest the comments in the MPC minutes.
The MPC retained the repo rate at 4 percent at its recent policy meeting and said the growth-supportive accommodative stance will continue as long as necessary till growth is revived. The policy guidance is now based on a data-based approach rather than time-based guidance. The shift happened in April.
The comments of the MPC members are indicative of the fact that despite the recent spike in retail inflation, the rate-setting panel may not shift its stance anytime in the foreseeable future. Growth revival remains the dominant worry.
Shashanka Bhide, one of the MPC members said while data on the impact of the second wave of the pandemic is limited, qualitative data emerging from the surveys of households and enterprises suggest significant dent in the consumer and business sentiments.
“At this juncture, providing a policy environment supportive of sustained economic recovery from the second shock of the pandemic is necessary,” Bhide said.
Similarly, Ashima Goyal, another member said the slump in consumer confidence in the second wave is slightly more than that in the first wave. “It is not yet clear if higher risk-aversion will dampen consumer demand more now or there will again be a desire to make up for forced abstention. But income and job loss, more indebtedness and impoverishment surely will shrink demand,” Goyal said.
“I vote for keeping the policy repo rate unchanged and the stance accommodative as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while remaining watchful to ensure that inflation remains within the target going forward,” Goyal said.
Another MPC member Jayanth R. Varma too said the balance of risk and reward continues to be in favour of monetary accommodation. However, Varma cautioned about the inflation situation saying the only source of comfort is that evidence suggests inflation is being driven not by domestic demand, but by supply side factors including the global surge in commodity prices.
“This could change as the recovery gathers steam, and the MPC must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long,” Varma said.
Micheal Patra said by keeping the policy rate unchanged and by persevering with the accommodative stance in this meeting, the MPC creates the space for further easing of financial conditions by the Reserve Bank. “The MPC has created the necessary conditions for supporting growth by maintaining the policy rate at its lowest level ever,” Patra said.
Further, it has also provided credible forward guidance matched by actions, committing to a path for future short-term interest rates that should re-engineer the recovery that was dented by the impact of the second wave of COVID-19, given the limited headroom from inflation remaining aligned with the target in April and forecast to stay within the tolerance band going forward, Patra said.
“The onus is on the Reserve Bank to operationalize the MPC’s guidance on an ongoing basis by ensuring congenial financial conditions across the system as well as for specific sectors, instruments and institutions,” said Patra.
RBI Governor Shaktikanta Das said going forward, the pace of vaccination and the speed with which COVID-19 second wave can be brought under control will have considerable bearing on the evolving growth as well the inflation trajectory.
“The Reserve Bank remains committed to undertake pro-active conventional and unconventional measures and to effectively channelling the systemic liquidity to alleviate stress of critical sectors which have borne the brunt of the second wave,” Das said.
In addition to liquidity provided under G-SAP operations, the Reserve Bank will continue to conduct other regular market operations to ensure that liquidity and financial conditions remain congenial, consistent with the accommodative stance of the monetary policy, the Das said.
The retail inflation had spiked in May at a six month-high and there are fears of price pressure continuing in the months ahead if the Covid second wave disrupts the supply-chains yet again.
The May consumer price index (CPI)-based retail inflation number has come at a six-month high at 6.3 per cent. That is compared with a 4.23 per cent in April. The MPC has the mandate to keep inflation in the 2 percent-6 percent band. But, more worrying is the core inflation number, which is the non-food, non-fuel part of the inflation. This component rose to an 83-month high 6.6 percent in May 2021, and is expected to remain above five percent throughout the fiscal year.
The MPC has shifted to state-based forward guidance from time-based guidance in April but at the same time has maintained that it will do everything possible to support growth recovery as long as necessary. In the June policy, the RBI projected the CPI inflation at 5.1 per cent during 2021-22. But the general consensus among economists is that inflation may average above that level in FY 22. India’s largest rating agency, CRISIL has forecast 5.3 per cent inflation in the fiscal year, 2022.
If high retail inflation persists, the MPC may find itself in a tough spot, some economists believe. For now, the stance remains clearly ‘dovish’.