The ongoing transmission of past monetary policy actions would help ease financial conditions, RBI Governor Shaktikanta Das had said during the Monetary Policy Committee meeting earlier this month, according to its minutes released on Friday.
The statement assumes significance as past rate cut transmission will provide lower interest rates which, in effect, is expected to trigger consumption and economic revival.
Besides, the Governor said that there exists space for future rate cuts if the inflation evolves in line with the expectations.
“This space needs to be used judiciously to support recovery in growth,” he said.
Das said that monetary policy at this stage has to provide adequate support to ensure a robust revival of the economy from the devastating effects of Covid-19, while at the same time, ensuring that any persistence of elevated inflation does not lead to unanchoring of inflation expectations.
“With the supply-side disruptions that are seen to drive the current inflationary pressures likely to be transient and wane out in months ahead as the economy normalizes, there is merit in looking through the current high levels of inflation and persevere with the accommodative stance for monetary policy as long as necessary to revive growth on a durable basis,” he said.
“Moreover, taking into account the projected moderation in inflation and the large output loss, I vote to keep the policy rate unchanged at present and continue with the accommodative stance, during the current financial year and into the next financial year, at the least. This would help to reduce uncertainty and market volatility. This would also enhance confidence in the monetary policy resolve to support the growth recovery process while ensuring that inflation remains within the target,” he added.
The penultimate meet of the MPC in 2020 was conducted from October 7 to 9.
The MPC decided to maintain the repo — or short-term lending — the rate for commercial banks at 4 percent on the back of persistently high inflation, fanned in part due to supply-side disruptions along with seasonal factors.
The meeting was attended by all the members, including Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Mridul K. Saggar, and Michael Debabrata Patra.
Besides, other members cited the need to support economic recovery.
In the meeting, RBI Deputy Governor Patra said that under these conditions, it is essential for monetary policy to remain accommodative and opportunistically exploit the headroom that opens up when inflation recedes, as it is projected in the second half of 2020-21.
“Three aspects need to be emphasized. First, it is important to separate false starts from durable growth drivers. In this context, all efforts need to be trained on the revival of investment. Second, in the evolving situation in which monetary policy is committed to an accommodative stance, it is necessary to monitor inflation dynamics closely for signs of generalization and persistence,” he said.
“For this purpose, all indicators of aggregate demand, including monetary and credit aggregates, warrant continuous examination for inflation impulses. Third, with unprecedented contractions in economic activity and elevated inflation posing a razor’s edge trade-off fraught with uncertainty, forward guidance has to be clear and decisive.”
Regarding inflation, Saggar said that inflation is currently above the upper tolerance band, it is not monetary in nature.
He pointed out supply disruption in food, increase in taxes on fuel and liquor, and the surge in gold prices “catalyzed by risk-off” has lifted inflation.
“In my view, headline inflation should start softening in October. Apart from favorable base effects, the unlocking has picked speed and would significantly reduce supply chain bottlenecks causing both agriculture and non-agricultural prices to correct,” he said.
“Monsoon risks to inflation have dissipated. Cumulative rainfall has been 9 percent above the long period average with its temporal and spatial distribution satisfactory. Area sown under Kharif has expanded by 4.8 percent. With the resumption of businesses by small poultry, high prices in protein items should witness some correction.”
On his part, Bhide said that there are clearly uncertainties facing the growth and inflation projections.
There is also uncertainty over the speed with which the Covid-19 pandemic is brought under control, which also affects growth and inflation scenarios in the next 2-3 quarters, he said.
“Towards the end of Q2, there are indications of a revival of the economy after the relaxation of restrictions on transportation and businesses across the country,” Bhide said.
“As supply chains adapt to the new conditions, recovery is expected to be stronger and sustained. To achieve this outcome, an accommodative monetary policy is needed at this juncture.”