As inflation moderates over the next financial year, it will allow the monetary policy to remain accommodative, Reserve Bank of India (RBI) governor Shaktikanta Das wrote in the minutes to the monetary policy committee’s (MPC) February meeting. Economic recovery from the pandemic remains incomplete and uneven, and continued support from various policies remains crucial for a sustained recovery, Das added.
“In this period of prolonged uncertainty, it would be wise to remain agile and respond in a gradual, calibrated and well telegraphed manner to the emerging challenges,” the governor said.
Consumer price-based inflation rose to a seven-month high of 6.01% in January, breaching the upper end of the MPC’s tolerance band of 4+/-2%. The MPC had voted 6-0 to hold the repo rate at 4% during the February policy. It voted 5-1 to keep the stance accommodative for as long as possible.
Deputy governor Michael D Patra observed that monetary policy chasing inflation instead of anticipating it is the main factor weighing down on global growth prospects. Taking a stance against the trend of monetary tightening by Western central banks, Patra said that monetary policy is an instrument of stabilisation. Its role is to align demand with supply, not the other way round.
“Monetary policy cannot play its stabilisation role when inflation is the result of supply constraints. So central banks have a choice: either accept higher inflation for some time or be prepared to be accountable for destroying demand,” Patra wrote.
There were also notes of dissent in the minutes. RBI executive director Mridul Saggar took the view that it will be important to maintain credibility by aiming to maintain inflation on a sustained basis at or near the target as soon as real economy conditions normalise.
“Low for long interest rates will certainly bring in macroeconomic imbalances and it is expedient that policy rate should be raised as soon as growth is judged to recover on a durable basis or inflation is seen to be turning endemic,” Saggar wrote. In the interim, the good part is that the country has built buffers against possible capital outflows, he added.
External member Jayanth R Varma, who voted against retaining the accommodative stance, referred to the persistence of the reverse repo rate at a low 3.35% as “a somewhat harmless fetishism” at the current juncture. Varma said he voted against the policy stance on two counts.
“First, a switch to neutral stance is now long overdue. Second, the continued harping on combating the ill effect of the pandemic has become counter productive and deflects the focus of the MPC away from the core issue of addressing the recessionary trends that go back at least to 2019,” Varma observed.
The other external members Ashima Goyal and Shashanka Bhide agreed with the statement’s overall focus on the strength of the recovery. Goyal said that it is necessary for the MPC to continue to stimulate demand at present, but not as much as earlier, because some recovery has taken place compared to last year. Bhide said that the need for favourable monetary and financial conditions has remained a critical condition to strengthen the positive growth trends in the economy.
