MPC Decision A 'Judgment Call' Between Growth And Inflation: RBI Bulletin
The Monetary Policy Committee's decision to overlook high inflation and prioritise growth, was a "judgment call", the Reserve Bank of India said in its monthly bulletin.
The committee's decision is backed with all available evidence—mobility-, activity- and survey-based, the RBI said. "Yet it is, in the ultimate analysis, a judgment call because at the heart of the association between growth and inflation, a sacrifice is embedded."
A reduction in the rate of inflation can only be achieved by a reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere, the RBI said.
Latest estimates for India suggest that for every percentage point reduction in the rate of inflation, 1.5-2 percentage points of GDP growth has to be foregone, according to the RBI’s sacrifice ratio.
"What if the MPC doggedly attacks the supply shock-induced price pressures in spite of the current state of the pandemic-ravaged economy and as a consequence, economic activity wilts into depression?" the bulletin asked, reiterating its case for easy monetary policy in the face of elevated inflation.
Given the trade-off imposed by the sacrifice ratio, the conduct of monetary policy has converged to a glide path of graduated disinflation that spreads the inherent output losses over a period rather than a "cold turkey" approach that applies the sledge hammer but causes large GDP losses, the central bank said.
So far, inflation is on track to stay within the trajectory envisaged and it is likely to stabilise during the rest of the year, the bulletin said.
Commenting on the state of the economy, the RBI said aggregate demand conditions are buoyed by the release of pent-up demand post-unlock. The supply situation is also improving with the monsoon catching up to its normal levels and sowing activity gaining pace.
A surge in tractor sales and a decline in demand for work under the MGNREGA also indicates that the market for farm labour is tightening as agricultural activity gathers steam.
Other Highlights Of Bulletin
There are already warnings of systemic risks to financial stability that monetary policy authorities shouldn't ignore as the unicorn IPO party gets going.
Favourable liquidity conditions have resulted in a large number of corporates taking recourse to the commercial paper market for raising funds. CP issuances surged by over 190% year-on-year to Rs 2.66 lakh crore in July 2021. It stood at Rs 1.71 lakh crore in June and Rs 3.89 lakh crore in the quarter ended June.
The bulletin reaffirmed that the RBI doesn't view G-Sec yields as cast in stone but evolving in an orderly manner in alignment with underlying fundamentals. "It has focused on the key role of the G-Sec market in facilitating monetary transmission by establishing benchmarks for other financial market segments."
Currency in circulation grew 10% compared to 22.4% a year ago, which is the slowest pace of currency demand recorded since November 2017.
Going forward, a central bank digital currency could form the backbone of a highly efficient new digital payment system.
A CBDC could enable broad access and provide strong data governance and privacy standards, and safeguard the payment system against illicit activities.
A CBDC will also exploit the country’s pole position in the domain of digital payments worldwide.
A CBDC will complement physical cash. It would compete with other online and offline payment methods and support a more resilient and diverse payment system, while shunning the risks associated with private digital currencies.
The RBI is conscious that the CBDC has to be meticulously planned, designed and tested.
On a lighter note, the the central bank decided to give the Big Mac’s currency valuation powers a go by. Instead, looking at affordability or how many burgers a currency can buy relative to the dollar, it measured how much a country’s GDP is valued in purchasing power terms. In terms of the Maharaja Mac, India is currently the fourth-largest global economy after China, the U.S. and Japan. This broadly conforms to the latest update of the International Monetary Fund, which said India is the third-largest economy in the world in purchasing power parity terms.