The monetary policy announced on 04 June promised an accommodative stance and low rates as long as required to ensure the revival of growth. Between the monetary policy announcement on 04-Jun and publication of minutes on 18-Jun, a lot changed in monetary equations. The US Fed in its June policy hinted that there could be two rate hikes by 2023, although the time table was still ambiguous.
The minutes of the MPC published on 18 June explain why the six members of the MPC had voted unanimously for status quo on rates and sustaining the accommodative stance. Would the stance of the MPC have been different in the context of higher CPI inflation and hawkish tone of the Fed? That is a hypothetical question. Let us focus on the perspectives of the six MPC members.
Shashank Bhide wants focus on COVID 2.0
Shashank Bhide believes that the downstream impact of COVID 2.0 as well as the impact of the lockdown could be deeper than visible. While data points are yet to come, Bhide pointed to household surveys hinting at dent on consumer sentiments. The only way to rectify the situation was to keep liquidity taps open.
Bhide was of the view that while -7.3% GDP contraction in FY21 was better than expected, FY22 was vulnerable to further downgrades. RBI had lowered growth expectations for FY22 from 10.5% to 9.5%. A combination of monetary and fiscal support would be essential to revive growth. Bhide voted to keep repo rates at 4% and stance accommodative as long as necessary to revive growth and sustain on durable basis.
Ashima Goyal says human impact bigger than economic impact
Ashima Goyal has pointed to an interesting contrast of COVID 2.0 as compared to COVID-19. Unlike in the first round, the second round has seen a marginal reduction in supply as lockdowns were better planned. However, the dent on consumption demand and consumer sentiments were much deeper. That must be the policy focus.
Goyal made an interesting point that the RBI should continue to hold its monetary stance even if the Fed were to commence its taper as the impact of a gradual taper would be limited. Goyal voted for status quo on rates and accommodative stance and underlined the need to make any guidance from the RBI data-based rather than time-based.
Jayant Varma warns of entrenched inflation expectations
Academicians may be given to pedagogy, but Jayant Varma. He makes an interesting point that the health shock could induce a spurt in savings at the cost of consumption. Hence demand growth could be slower than expected.
Varma has also pointed out that inflation trajectory remains the X-factor in this entire story. Supply side inflation is already entrenched and that is impacting expectations. Varma pointed out that RBI has displayed its commitment to inflation targeting despite monetary demands and that reputations stood them in good stead. Varma voted for status quo on rates and accommodation but more as the better of the two choices.
Mridul Saggar talks of the new normal in inflation
Saggar has rightly pointed out that the economy must be prepared for levels of inflation, above the median but within the upper limit. According to Saggar, inflation being supply driven, does not really raise the spectre of unbridled demand pushing prices up.
Saggar has rightly pointed out that all policies are about choices and the current choice of low rates and accommodative stance has prevented growth from plummeting and job losses from escalating. Saggar has taken a more contrarian approach that withdrawing monetary support at this stage would be premature and dampen the COVID 2.0 battle.
Dr. Michael Patra says onus on further monetary easing on RBI
Dr. Patra has underscored that COVID 2.0 called for a fresh set of monetary and fiscal incentives. In a way, the job of the MPC was to create the congenial atmosphere for the same. By sticking to a near unanimous stance on low rates and accommodative liquidity, Patra feels that the MPC has given RBI the policy room to provide further stimulus to address COVID 2.0, if warranted.
RBI Governor says G-SAPs reflective of new approach
Shaktikanta Das highlighted that the pace of vaccinations and Kharif output would be the X-factors and both needed an accommodative monetary milieu. Das underlined that the RBI cannot restrict itself to just conventional measures but would explore a plethora of unconventional measures too. G-SAPs are one such measure and while Das was not required to vote, he also favoured status quo on rates and an accommodative stance. However, he has hinted at more innovative monetary methods to handle the pandemic situation.
Post the policy announcement, there have been a number of critical data points. Headline inflation came in at 6.3%, core inflation at an 83-month high of 6.6% and the US Fed has laid out a time frame for rate hikes. While it may be early, these are likely to have a bearing on the approach of the MPC going ahead. That would be grist for the next round!