MPC Minutes: Declining Inflation Gave Committee Enough Comfort To Remain Growth-Supportive

India’s six-member Monetary Policy Committee found enough comfort in the recent fall in inflation to remain explicitly growth-supportive as the economy recovers from the Covid-19 crisis. Committee members, however, warned of inflation pressures that may emerge from rising commodity prices with some of them calling for a cut in indirect taxes on fuel products.

At its meeting in February, the MPC kept the repo rate unchanged at 4%. It also maintained its forward guidance, suggesting that it will remain accommodative at least into next financial year to revive growth on a durable basis.

Key comments by MPC members are listed below:

Shaktikanta Das, RBI governor

• Given the sharp moderation in inflation along with a stable near-term outlook, monetary policy needs to continue with the accommodative stance to ensure that the recovery gains greater traction and becomes broad-based.
• CPI inflation, excluding food and fuel, remains elevated at 5.5%.
• Proactive supply-side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel — in a coordinated manner by centre and states — are critical to contain further build-up of cost-pressures in the economy.
• The commitment to keep accommodative stance “during the current financial year and into the next financial year” is reflective of a time-based guidance; whereas on the other hand, the expression “to revive growth on a durable basis” characterises a state-based guidance; that is, guidance contingent on the state of the economy.
• Market participants also need to factor in the forward guidance with respect to the two-phase normalisation of the cash reserve ratio which opens up space for a variety of market operations to inject additional liquidity through instruments like open market operations, among others.

Michael Patra, RBI deputy governor

• If the sharp disinflation in vegetable prices extends into the spring, headline inflation can ease further, empowering the conduct of monetary policy.
• Upside risks to the outlook for inflation persist. First, core inflation remains stubborn. Second, rising international commodity prices are being watched the world over with concern as heralding the return of inflation.
• For India, the relentless hardening of international crude prices is worrisome, especially as their impact on inflation is amplified by disproportionately high excise duties.
• Tradeoffs facing the conduct of monetary policy may become sharper in the near term. Shocks to economic activity from the winding down of exceptional pandemic measures will have to be balanced against the persuasive incentive to continue with them but with the risk of becoming immobilised in liquidity traps.
• Concerns about financial stability have risen. The recent new highs scaled by equity markets could be driven by irrational exuberance; it is difficult to tell in an environment of exceptionally low interest rates all around, large corporate profits but still no capex to write home about, and high levels of market borrowings.

Mridul Saggar, RBI executive director

• Bulk of the food-price correction in CPI has already happened. Food prices are at near-bottom, though they may start firming up from Q1 2021-22.
• Cost-push increases may come from higher crude oil prices that will feed into costs, especially fertiliser prices and as they get factored in MSPs.
• Faster than anticipated, most manufacturing and rural high frequency indicators have already normalised past pre-pandemic levels. However, services sector indicators are languishing much below those levels.
• Hysteresis is visible to some degree with anecdotal evidence of some micro-enterprises and informal unincorporated household enterprises having permanently closed production shops.
• Monetary policy will need to lean against the wind to keep interest rates low to the extent possible. If central bank open market operation purchases are moderate, it entails the risk of crowding out of private investment; if they are large, it carries risk of reengineering inflation.

Shashanka Bhide, MPC member

• Accommodative monetary policy stance is needed to strengthen ongoing economic recovery enabling expansion of both output and demand.
• The need for revival of economic activities back to the pre-pandemic levels and then at a pace that is consistent with income and employment goals remains prominent in the present economic policies.
• The prospect of good rabi crop harvest is expected to exert downward pressure on the agricultural commodity prices in the coming months.
• Easing of the pressures in the non-food sector will require easing of some of the key input costs such as transportation services and energy, both by improved supply conditions and productivity.

Ashima Goyal, MPC member

• Inflation presents a mixed picture. Prices of many food products have softened, bringing down headline inflation. Profiteering in retail supply has not been able to withstand excess supply, although data shows only the beginning of reduction in retail margins.
• The fall in short-term household inflation perceptions shows that households are observing improvements in retail supply—as yet more for perishables.
• The current macroeconomic configuration and its expected future evolution as outlined above implies there is space for the MPC to continue to support the revival of the economy with inflation remaining in the target band.

JR Varma, MPC member

Varma chose to keep his statement short and summed up the current state of the economy,

“With both inflation and growth outcomes being well within the range of expectations of the MPC, and short-term interest rates being within the corridor defined by the repo and reverse repo rate, there is nothing to be done and there is nothing to be said as of now. The MPC must of course continue to be data-driven and must continue to monitor future developments carefully,” he wrote in a one-para comment.