Concerns over sustainable growth prompt MPC to keep rates

The six-member committee met between December 6-8 and retained the repo rate at 4%, which was last revised in May 2020. Since March last year, it has reduced the repo rate by 115 basis points (bps). All members except Jayant R Verma – Shashank Bhide, Ashima Goyal, Mridul K.

“Overall, of the 59 High Frequency Indicators that have become available for October out of 67 that I track, 88% of the indicators displayed month-on-month correction after a somewhat weaker August and September,” said Mridul Said K Sagar, Executive Director, RBI and an MPC member.

Sagar pointed out that while the pace of normalization has picked up significantly, a third of the indicators are yet to cross their pre-pandemic levels. To be sure, tensions in the informal sector are not adequately captured by these indicators, he said.

“Small steps towards policy normalization may now suffice and one can decide to switch to a tighter monetary policy cycle when it becomes clear that demand revival has achieved resilience and the pandemic risk to growth is low. or alternatively if inflation continues to spread for months resulting in inflation being normalized and maintained over the next year,” he said.

According to Deputy Governor Michael Patra, the Indian economy is on a path that is different from the global situation. To support his argument, Patra pointed out that bank credit is rising, tax revenues are rising, exports are growing rapidly and the current account balance is set to turn into a deficit due to strong import demand. However, decoupling has its limitations and vulnerabilities.

“Gross Domestic Product (GDP) levels in the second quarter of 2021-22 are barely at the so-called pre-pandemic levels of the second quarter of 2019-20, which themselves grew at the slowest pace in six years. Consumption spending is stifled by households hesitant to make discretionary spending. Private investment remains timid and is yet to participate in the recovery,” Patra said.

On inflation, Patra said a moderation in the common cold may bring down food inflation, but will keep the main inflation rate setting committee awake. This, he said, stemmed from the rising prospects of selling of a safe haven in gold prices and price revision of consumer durables, automobiles, especially telecom duty on clothing and footwear and the recent upward revision of Goods and Services Tax (GST) rates. will arise. until January 2022.

Patra said India’s inflation developments reflect a scissor effect – a rebound in demand hit by supply constraints; But shipping delays, delivery lag and semi-conductor shortages cannot last indefinitely and should certainly improve in the second half of 2022, as predicted by the IMF. “The biggest risk of infection now is from the new version. Until a clear picture emerges on the outlook for the near future, we must be careful and resume war preparations,” he said.

RBI Governor Shaktikanta Das believes that uncertainty over a developed global macroeconomic outlook is rising and even as economic activity prospects are improving, with key drivers such as private consumption rising in their well below pre-pandemic levels.

Das said, “Given these uncertainties, a sustainable, broad-based and self-sustaining rebound requires continued policy support, particularly to nurture revival in sectors that are lagging and developing. It is for their safety,” Das said. In such a scenario, it would be prudent to watch for well-established growth signals while remaining cautious on inflation dynamics.

Das also said that it is necessary to thoroughly understand the impact of the Omicron variant.

MPC member Jayant Verma said that his The views haven’t changed much since the August and October statements. Verma said he believes that monetary policy is no longer the right tool to tackle the COVID-19 pandemic, the economic impact of which, in contrast to its health effects, has been greatly reduced and more concentrated in narrow pockets of the economy. has gone.

He said it is not appropriate to stick to the accommodative monetary policy stance adopted for the first time in May 2020, when the adverse economic effects of the pandemic were at their peak. However, he voted in favor of keeping the repo rate at 4%.