Keeping in mind the prevailing economic situation, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), after a three-day brainstorming earlier this month, stressed the need to keep inflation within the mandated range. The members reiterated the need to keep the inflation below the upper limit of six per cent and argued for a pause to see how growth and inflation play out.
The MPC is mandated to maintain inflation at four per cent over the medium term and keep it within a two per cent to six per cent range at all times. A breach of this band for three straight quarters would require the committee to offer an explanation to the government; in the last two-quarters inflation has remained above this range.
According to the MPC’s minutes, which was released on Thursday, RBI Governor Shaktikanta Das said it would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation. As the staggered opening of the economy progresses, and supply bottlenecks ease and the price reporting pattern stabilises. Das feels they should wait for some more time for the cumulative 250-bps reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads.
The Governor explained that given the uncertain inflation outlook, the central bank has to remain watchful to see that the momentum in inflation does not get entrenched, which is also dependent on effective supply-side measures. With the economy in a fragile state, Das said the recovery in growth assumes primacy. Deputy Governor Michael Patra wrote that inflation surprise of recent months are undermining the MPC’s actions and stymieing its resolve to do what it takes to review growth and mitigate the impact of COVID-19 on the economy.
MPC member Chetan Ghate wrote that the government must continue to focus on much needed structural reforms. He said some fiscal space should be reserved for later outbreaks. “On the upside, a perfect storm of cost-push pressures, accommodative monetary policy, and adverse food supply shocks could lead to a pickup in inflation,” Ghate said. “On the downside, the paradox of thrift, that is, forced saving pressure induced by a de-facto lockdown, could be a potent disinflationary force.” Calling for a war on prices, Ghate said future MPCs should not go soft on inflation. “Monetary and fiscal policy will need to be used wisely with a clear understanding of what and what not they can achieve in terms of controlling inflation, smoothing out the business cycle, and limiting spurious economic volatility.”
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