December MPC minutes plumps for accommodative stance

In the 04 Dec policy announcement, RBI had maintained status quo on repo rates at 4% and also maintained an accommodative monetary stance. This was despite Oct-20 inflation touching a peak level of 7.63%.

December 21, 2020 7:31 IST | India Infoline News Service
RBI published detailed minutes of the Monetary Policy Committee (MPC) meeting of Dec 2-4 on 18 December. The minutes give an in-depth insight into the arguments given by the six members of the MPC and the justification for their stance; which eventually crystallizes into the Monetary Policy.

In the 04 Dec policy announcement, RBI had maintained status quo on repo rates at 4% and also maintained an accommodative monetary stance. This was despite Oct-20 inflation touching a peak level of 7.63%.

Quick Recap of Dec-20 monetary policy

There were two key highlights of the monetary policy announced on 04 December.
  • The policy held repo rates at 4%. As a result, reverse repo rate stayed put at 3.35% while the bank rate and Marginal Standing Facility (MSF) rate remained static at 4.25%.
  • The MPC opted to continue the accommodative stance as long as necessary (at least till end of 2021) to revive growth on durable basis.
How exactly did this policy statement get crystallized? Here is a gist of the arguments of the 6 MPC members.

Shashank Bhide: Need to support green-shoots of growth

The gist of the argument made by Shashank Bhide was that growth indicators like PMI, IIP, Core Sector and GDP were better than expected. Corporate profits had also flattered in the Sep-20 quarter. Bhide was of the opinion that the MPC decision to keep rates at 4% and sustain accommodative monetary stance in Oct-20 paid off by supporting an economic recovery. There was no need for the MPC to tamper with that approach. Shashank Bhide voted for holding repo rates at 4% and maintaining monetary stance as accommodative.

Dr. Ashima Goyal: Accommodative policy key to business survival

Ashima Goyal pointed to an interesting aspect of corporate growth in the Sep-20 quarter. Had RBI not kept monetary policy accommodative, businesses would have been starved for funds and the mid-sized companies would have been the most vulnerable! Goyal pointed out that in the absence of a clear accommodative trajectory; SME bankruptcies would have spurted; offsetting the efforts of the government to revive the economy.

She added that while inflation remained elevated; inflation expectations tapered. That gave the MPC the comfort to sustained accommodation even if not to cut rates. Ashima Goyal voted for status quo on repo rates at 4% and sustained accommodative monetary stance.

Jayanth Varma: Dissents on accommodation, in principle

Jayanth Varma’s views assume significance as he had dissented to the use of the word “continued accommodation” in the Oct-20 policy. His contention was that accommodative stance should be data driven and not taken for granted. However, in the Dec-20 policy, Varma chose not to dissent although he still disagreed in principle.

Varma pointed out that between October and December; the short term bond yields had fallen further from 3.35% to 2.93%; leaving little room for further rate cuts. Varma has clarified that risk-reward still favours an accommodative stance. However, he still has apprehensions of accommodative guidance that is not data-driven.

Mridul Saggar: Monetary policy entering complex phase

Mridul Saggar makes an interesting point that the policy trade-offs may be sharpening. Growth is recovering but yet to take sustainable roots. Fiscal impulses are weakening making a case for continued support. While low inflation is the target, the prices may be getting distended threatening sustained inflation in the economy.

Mridul Saggar pointed out that most optimistic estimates for FY21 and FY22 were based on the assumption that accommodative policy will continue. The time is not ripe to belie such expectations. Saggar voted to maintain status quo on rates and sustained accommodative stance.

Dr. Michael Patra: Focus on mitigating COVID impact

Dr. Patra pointed that the primary focus must be to provide the angelic touch to mitigate the COVID impact. The impact was severe in terms of income depletion, loss of livelihood, and purchasing power. That is a complex matrix that is best handled with a combination of low rates and accommodative stance.

Patra pointed out that economic activity was recovering; but very tentatively. An accommodative monetary policy was mandatory till the time the growth become more self-sustaining. Dr. Patra voted for holding repo rates and monetary accommodation as long as necessary.

Dr. Shaktikanta Das: Real challenge to grow beyond pre-COVID levels

The RBI governor pointed out that overall economic activity was still below mid-2019 levels. Das has also pointed that the green-shoots of recovery were too reliant on rural demand with urban demand yet to follow suit. Hence an accommodative policy and low rates would be essential till time urban demand also picked up.

The governor’s decisive vote was not required as there was already a consensus among the members. Dr. Das also veered towards status quo on repo rates and sustained monetary accommodation for as long as required.

In conclusion, the MPC finds its policy choices caught between persistently high inflation and the need to sustain the economic recovery in tough macro conditions. Under these circumstances, the MPC has done the best it could!

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