The monetary policy announced on 07-Apr was amidst tough circumstances. The growth indicators were faltering and inflation was again approaching the 6% mark. The bond yields in the US shot up from 0.52% to 1.76% on fears that the Fed may front-end rate hikes. Above all, the COVID resurgence was posing a new challenge for the Indian economy.
There was no surprise that the Monetary Policy Committee (MPC) opted to maintain repo rates at 4% and the reverse repo rates at 3.35%. In addition, the MPC also opted to keep the stance of the monetary policy accommodative. But, there were two differences as would be clear from the minutes of the MPC meet. Firstly, inflation risk was explicitly sounded out by members. Secondly, there was emphasis on being data-driven rather than time-driven in giving monetary guidance.
All six members of the MPC voted to hold repo rates and to continue the accommodative stance of policy as long as required to revive economic growth.
Shashank Bhide focused on GDP downgrades
Shashank Bhide sees a macro risk in the FY21 GDP contraction deepening to -8% as per second advance estimates (AE) put out by the CSO. While the RBI continues to hold its FY22 GDP growth projections at 10.5%, foreign brokerages have downgraded the growth for FY22 from 12.5% to 11%. Clearly, the manufacturing slack must be supported by low rates.
Bhide focused on the need for policy support so that the first two quarters of FY22 can overcome the challenges posed by the resurgence of COVID. Bhide pointed out that growth in IIP and core sector were too erratic in the last five months and an accommodative stance was warranted till the time growth returned on a durable basis.
Ashima Goyal suggests low rates to revive consumer confidence
Ashima Goyal has given 2 justifications for the status quo on rates and the accommodative policy stance. Firstly, the resurgence of COVID and the lockdown in some states could shave off a few percentage points from GDP growth. Like in the previous MPC meet, Goyal stressed on the need to get back to pre-COVID 2019 levels of growth first.
Goyal has pointed out that elevated uncertainty levels called for more flexibility to the MPC and an innovative approach to monetary policy. However, there is also a word of caution from Goyal as she favours a shift from a time-based guidance to more data-based guidance. Goyal voted for status quo on rates and sustained accommodative stance.
Jayant Varma is worried about the uneven economic recovery
Jayant Varma was brevity personified. However, he has made an important point about the risks of an uneven and tentative economic recovery visible in India in last 6 months. Jayant Varma focused on the need to keep rates at 4% and the monetary stance accommodative.
Varma made an interesting point about the futility of time-based forward guidance. It was supposed to bring down bond yields, which it did not. Hence Varma does not see any merit in continuing with time-based guidance and suggests shifting to data-based guidance. Varma has emphasized on the importance of inflation targeting.
Mridul Saggar and the 2-month mutation
Saggar has underlined 3 things that changed between the Feb-21 and the Apr-21 policy. Resurgence of COVID was one factor and the other factor was that economic recovery was clearly losing steam. Above all, the inflation monster was also back in action.
While supporting the accommodative stance, Saggar has highlighted two limitations of too much accommodation. Firstly, fiscal space cannot result in debt monetization as it would push inflation higher. He also highlighted the risk of a current account deficit on the INR. Support should be mitigative and not a matter of policy.
Dr. Michael Patra underlines rising risks to economic recovery
According to Dr. Patra the resurgence of COVID and the slow pace of vaccinations were 2 major event risks for economic recovery. Dr. Patra pointed out that supporting growth and mitigating risks to recovery was the first priority. However, this cannot come at the cost of runaway inflation. That will be the circumscribing element in accommodation.
RBI Governor wants manufacturing to catch up with agriculture
Shaktikanta Das pointed that the first priority was to put manufacturing on the same high growth footing as agriculture. He pointed that PMI continued to show expansionary trends even through the COVID resurgence. This was also the first MPC since the government notified continuing the inflation range between 2% and 6% for next 5 years.
Even as core inflation has been a risk, Das pointed that the risks like rising yields can be handled through methods like G-SAPs. However, in view of the low business and consumer confidence, Das voted to keep the stance accommodative in the quest for durable growth.
There are enough indicators from the MPC members that monetary accommodation and low rates are a means and not an end. Members have exhorted to shift focus to data-based guidance rather than time-based guidance. That should be the road ahead.