MPC Minutes: Committee Worried About Impact Of Covid Second Wave On Growth
A pedestrian walks past the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Kanishka Sonthalia/Bloomberg)

MPC Minutes: Committee Worried About Impact Of Covid Second Wave On Growth

India’s six-member Monetary Policy Committee continued to see the need to support the fragile economic recovery, while looking through the current bout of inflation, show minutes of the meeting released on Thursday. The committee members also supported a return to state-based guidance given the level of uncertainty in the economy.

The MPC, at its meet earlier this month, kept the benchmark repo rate unchanged at 4%. The committee, in its resolution. maintained an accommodative stance.

Shaktikanta Das, RBI Governor

The rapidly rising cases of Covid-19 is the single biggest challenge to ongoing recovery in the Indian economy, said Das in the minutes. “The need of the hour is to effectively secure the economic recovery underway so that it becomes broad-based and durable,” he said.

Das added:

  • The renewed jump in Covid-19 infections adds uncertainty to the growth outlook. In such an environment, monetary policy should remain accommodative to support, nurture and consolidate the recovery.

  • The projection of inflation rate at 5% for the full year 2021-22 takes into account both the upside and the downside pressures.

  • As part of the liquidity management strategy for 2021-22, the Reserve Bank’s objective would be to ensure orderly evolution of the yield curve and to avoid volatility in the government bond market.

  • Going forward, the RBI would continue to ensure ample surplus systemic liquidity and the system would remain in surplus even after meeting the requirements of all financial market segments and the productive sectors of the economy.

While the MPC’s forward guidance over the past year has been helpful in anchoring market expectations, the state-based forward guidance, which the committee has moved to, reflects a commitment towards securing sustainable growth, Das said.

Given the uncertainties and the fact that we are in the beginning of a new financial year, it is too early to give explicit time-based forward guidance. The forward guidance in terms of securing a sustainable growth on a durable basis itself testifies to our commitment to continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target, going forward.
Shaktikanta Das, RBI Governor

Michael Patra, RBI Deputy Governor

Patra struck a note similar to Governor Das. Risks to the recovery have become accentuated since the MPC’s February meeting, said Patra.

  • New waves of infections and the inexorably slow pace of vaccinations; moderation in several high-frequency sentiment indicators; global risks and spillovers are a matter of concern.

  • Monetary policy has to remain supportive of the economy until the recovery is more sure footed and its sustainability assured.

  • The inflation print of February reflects pandemic effects in the form of input cost pressures—though still muted in translating into selling prices—retail margins and increased costs of doing business as supply chains are still mending.

Accordingly, I would continue to look through the recent elevation in inflation and remain focused on reviving the economy on a path of strong and sustainable growth.
Michael Patra, RBI Deputy Governor

An integral part of this approach would be to insulate domestic financial markets from global spillovers and volatility so that congenial financial conditions continue to support growth, Patra added.

Mridul Saggar, ED, RBI

Saggar said the economic recovery, which is “beginning to lose some steam” can come under risk if this new wave of infections is not flattened soon. “This is especially so as monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital, though expansion of policy toolkits can still afford additional comfort.”

  • The realisation of the projected growth (10.5%) will translate to only a meagre average growth rate of 0.85% in two years following 2019-20. Both consumption and investment need to be stimulated. Capacity utilisation rate at 66.6% is well below the long-term average of 73.6%.

  • Consumption needs support from removing credit frictions and more redistributive policies.

  • The inflation momentum was somewhat above average, especially driven by core and fuel. Global commodities have a weight of 22% in CPI but pass-through to headline inflation is low. Therefore, it should be possible to keep inflation within the band.

In an apparent reference to the focus on bond markets, Saggar said that “there is risk in too much focus on asset prices in the conduct of monetary policy.”

Credit channel that works in tandem with interest rate channel is far more important than the asset price channel for effective monetary transmission. Countries have certainly relied on negative nominal or real rates in an attempt to avert deep recessions. In part they have helped limit job losses and scarring. However, these benefits have to be weighed against the low interest rates fuelling K-shaped recoveries with increased inequalities and inflicting financial repression for savers.
Mridul Saggar, ED, RBI

Saggar added that such policies could bring added macroeconomic risks for countries where inflation is not as dampened as in advanced economies.

JR Varma, MPC Member

Varma, too, saw the recovery as uneven and incomplete and supported the accommodative monetary policy.

  • The renewed jump in Covid-19 infections in certain parts of the country has increased the downside risk to the growth momentum.

  • On the other hand, inflation rates have been consistently well above the mid point of the target zone and is forecast to remain elevated for some time. This is a difficult situation, but I believe that the balance of risk and reward is in favour of monetary accommodation

Commenting on the nature of forward guidance, Varma, who had opposed time-based guidance, said the MPC must have the agility and flexibility to respond to data instead.

The principal motivation for the forward guidance was to reduce long-term yields in the backdrop of an excessively steep yield curve, said Varma. Unfortunately, forward guidance has failed to flatten the yield curve, and I see little merit in persisting with it any more, he added.

As the popular quote (often misattributed to Albert Einstein) says: insanity is doing the same thing over and over again and expecting different results. A flattening of the yield curve remains an important goal but, I think it must be pursued using other instruments which largely lie outside the remit of the MPC.
JR Varma, MPC Member

Apart from the inability to control yields, Varma also noted that forecasting has become difficult in the aftermath of the pandemic. In this situation, I think it is not prudent to repose excessive faith in forecasts, he said.

Ashima Goyal, MPC Member

Goyal said the effect on growth could be marginal if complete lockdowns and bans on interstate movement are avoided.

Goyal added:

  • Even the above 10% growth most analysts still expect for 2021-22 will barely take us to the level we had reached in 2019. We have to also make up for lost time; alleviate widespread job loss and income stress.

  • With easier financing conditions and a healthier financial sector, there is a chance of a credit-led cycle this time. To the extent investment rises, potential growth will also rise with it.

  • The spread of the 10-year G-Secs over short rates was 60 basis points over 2011-17 before rising sharply in 2018. The current spread of over 200 basis points, despite large bond buying support, points to markets being caught in an “irrational trap”.

Shanshanka Bhide, MPC Member

The ability to ensure sustained growth will depend on effective control over the pandemic that would permit economic activities, Bhide said.

  • The improvement in growth performance in the final two quarters in FY21 is fragile and will require strong policy support for broadening and sustaining positive momentum.

  • Expansion of supply of goods and services in public and private spheres will require new investments and access to funds.

  • The monetary policy environment so far has provided support to sustaining economic activities and recovery of growth. Such policy environment is needed to strengthen and broaden the ongoing recovery process.

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