Updated: August 21, 2021 8:52:48 am
While five of the six members of the Monetary Policy Committee (MPC) of the Reserve Bank of India voted for retaining the accommodative stance at the MPC meeting on August 6, one member — Jayanth Varma — was for taking a “hard look” at continuing the easy money policy as the balance of risk and reward in favour of monetary accommodation is gradually shifting.
RBI Governor Shaktikanta Das said 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 the let the economy tumble?” Das said, according to the minutes of the MPC meeting.
“The need of the hour is twofold: first, 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 inflation to 4 per cent over a period of time in a non-disruptive manner,” he added.
However, taking a different view, Varma — who voted against the accommodative stance — said “easy money today could lead to high interest rates tomorrow”. “In the last several meetings, my statements have expressed the belief that the balance of risk and reward is in favour of monetary accommodation. 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, as per the minutes.
Unveiling the bi-monthly monetary policy, the RBI panel raised the projection for retail inflation to 5.7 per cent in the financial year 2021-22 from 5.1 per cent earlier, quite close to its upper tolerance limit in the 2-6 per cent band. The MPC left the repo rate unchanged at 4 per cent while continuing with the accommodative stance. It retained the real GDP growth at 9.5 per cent in the current financial year.
According to the RBI minutes, Varma said by demonstrating its commitment to the inflation target with tangible action, the MPC will be able to anchor expectations, reduce risk premia, and sustain lower long term interest rates for longer, thereby aiding the economic recovery. “For these reasons, I am not in favour of the decision to keep the reverse repo rate at 3.35 per cent, and vote against the accommodative stance,” he added.
While the economy is struggling to regain the momentum that had gathered in the second half of 2020-21, the highest priority now is to revive growth along a sustainable trajectory that becomes compatible with the inflation target as the pandemic recedes, RBI Deputy Governor Michael Patra said. “The price that has to be paid for this policy choice is inflation in the upper reaches of but within the tolerance band in this exceptional, pandemic ravaged year of 2021-22, as against the overshoot above the upper tolerance band in 2020-21. So far, inflation outcomes are tracking this projected path,” Patra said.
“Persistent high inflation means that the monetary accommodation has to be somewhat restrained,” Varma said, arguing for raising money market rates towards the repo rate of 4 per cent from the current ultra-low level of 3.35 per cent. The repo rate of 4 per cent corresponds to a negative real rate in the range 12 of 1-1.5 per cent based on forward looking inflation forecasts. “In my view, this level of rates is currently appropriate for reviving economic growth without excessive risk of an inflationary spiral,” Varma said.
Patra said a solidly entrenched increase in aggregate demand is yet to take shape. Although it seems meaningful to compare progress with a pre-pandemic year, it needs to be noted that in 2019-20, a cyclical downturn had matured over two-and-a-half years, taking down real GDP growth to its lowest in the 2011-12 based series of national accounts. Thus, there is substantial slack in resource utilisation in the economy which needs to be drawn in to get economic activity back to normalcy, he said.
While pick-up in the pace of vaccinations against the disease enables return to more stable working conditions, uncertainties are highlighted by the continued potential for the emergence of new infections as the economic activity picks up unless the people’s Covid appropriate behaviour becomes a norm, said Shashanka Bhide, Member, MPC. Likelihood of emergence of new variants of the virus and its impact is also posing a challenge to achieve sustained recovery of the economy.
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