In the summit that was titled as "Monetary Policy: Trial by Pandemic", Patra said that "the course of monetary policy will be shaped by the manner in which the outlook for growth and inflation evolves."
Talking about inflation, Patra said that in the MPC’s assessment, inflationary pressures are largely driven by supply shocks. Although shocks of this type are typically transitory, the repetitive incidence of shocks is giving inflation a persistent character.
" Contributions to inflation are emanating from a narrow group of goods – items constituting around 20 per cent of the CPI are responsible for more than 50 per cent of inflation. The analysis of inflation dynamics indicates that the easing of headline inflation from current levels is likely to be grudging and uneven," Patra said.
According to Patra, firstly, the distribution of inflation has skewed to the right with high variance – a large number of items is massed in a long fat right tail, pulling the mean of the distribution to the right of the median. To us, this indicates persistence of supply shocks. Second, over the months ahead, supply augmenting measures taken by the government should mend disruptions and imbalances, alleviating some cost pressures, but the pass-through of imported price pressures to retail prices remains incomplete. Third, turning to second order effects, house rentals remain subdued and rural wage growth is muted, but rising staff costs suggest that incipient wage pressures are building in the organized sector as workplaces fill up.
"Our surveys of the manufacturing, services and infrastructure firms are also pointing to an increase in selling prices in the period ahead," Patra explained.
Patra stated that the MPC remains committed to its primary mandate of price stability, numerically defined as 4 per cent with a tolerance band of +/- 2 per cent around it. Taking into account the outlook on growth and inflation and keeping in mind the inherent output costs of disinflation, it is pragmatic to envisage a glidepath along which the MPC can steer the path of inflation into the future. The MPC demonstrated its commitment and ability to anchor inflation expectations around the target of 4 per cent during 2016-20.
Further, Patra said, "Confronted with a once-in-a-century pandemic, the MPC had to tolerate higher average inflation of 6.2 per cent in 2020-21. The envisaged glidepath should take inflation down to 5.7 per cent or lower in 2021-22, to below 5 per cent in 2022-23 and closer to the target of 4 per cent by 2023-24. The rebalancing of liquidity conditions will dovetail into this glidepath, but the choice of instruments is best left to the judgment of the RBI with its considerable experience with such tapers."
On the economy as a whole, Patra said that their "surveys suggest that seasonally adjusted capacity utilization in manufacturing is expected to recover in the second half of the year, but the catch-up with trend may take more time. Inventories of raw materials remain below pre-pandemic levels and are expected to be drawn down further. In conjunction with improving production and order books, this suggests that demand is gradually recovering."
"For the economy as a whole, the output gap - which measures the deviation of the level of GDP from its trend – is negative and wider than it was in 2019-20. Given these developments and with the GDP outcome for the first quarter coming in just a shade below the RBI’s forecast, the projection of growth of 9.5 per cent for the year as a whole appears to be on track. Even so, as Governor Shri Shaktikanta Das pointed out in a recent interview, the size of the economy would just about be exceeding the pre-pandemic (2019-20) level," Patra added.
In his concluding remarks, Patra said, "Monetary policy is all about the feasible. This inherently imposes a trade-off with the desirable. Pragmatism, gradualism and calibration are its distinctive features, except in challenging times when central banks become defenders of the first resort or as it is said, the only game in town when the chips are down. Every crisis makes them wiser, hones their skills and strengthens their commitment to the goal of macroeconomic and financial stability to promote sustainable and inclusive growth."