MPC minutes show one member saw little merit in continuing with central bank’s forward guidance
Most members were not very sure how the second Covid wave would play out
The second wave of Covid infections and its impact on growth loomed large on the minds of the six MPC members, showed the minutes of the meetings released by the RBI on Thursday.
The monetary policy committee (MPC) members were also in favour of engaging with the bond market on yields.
Jayanth R Varma, external MPC member, said RBI’s forward guidance has failed to bring down yields and that the practice can be stopped.
The RBI announced Rs 1 trillion of bond buying from the secondary market in the first quarter.
In the end, the MPC decided to keep the policy repo rate unchanged and the stance at accommodative “for as long as necessary to sustain growth, while ensuring that inflation remains within the target”.
The edited minutes showed that even as the RBI kept its growth forecast for the fiscal year unchanged at 10.5 per cent, most members were not sure how the second Covid wave would play out. “Rapidly rising cases is the single biggest challenge to ongoing recovery in the Indian economy,” said RBI Governor Shaktikanta Das.
The economy was evolving on the lines of the February MPC resolution, with improving demand conditions, investment enhancing measures by the government and external demand imparting an upside to growth prospects, but the recent jump in infections and its impact on economic activity needed to be watched carefully.
The “need of the hour” was to “effectively secure the economic recovery underway so that it becomes broad-based and durable”, Das said, adding, “the RBI would take all steps to ensure orderly conditions in the financial markets and to preserve financial stability.”
Deputy Governor Michael Patra said the recent rise in inflation could be looked through while the focus could remain “on reviving the economy on a path of strong and sustainable growth”.
“An integral part of this approach would be to insulate domestic financial markets from global spillovers and volatility so that congenial financial conditions continue to support growth,” Patra said.
RBI’s Executive Director Mridul K Saggar said the economic recovery could come under risk if the new wave of infections was not flattened soon, especially as “monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital”. Expansion of policy toolkits, though, could still afford additional comfort, according to Saggar, who heads the monetary policy department. The rise in infection could delay full normalisation by a quarter or two. Health policies have become the first line of defence, while the “monetary and fiscal policies can only play second fiddle”.
The baseline projection in growth of 10.5 per cent was on account of an “all-time low base,” he said, adding, the “realisation of the projected growth will translate to only a meagre average growth rate of 0.85 per cent in two years following 2019-20”.
This provided justification for the monetary policy’s continued support to growth, Saggar said, adding both consumption and investment needed to be stimulated. Capacity utilisation rate at 66.6 per cent was well below the long-term average of 73.6 per cent.
External member Shashanka Bhide said: “The pace of recovery of output needs to offset the negative impact of the Covid-19 shock to the economy in terms of growth in income, and employment will be substantial and sustained over many years.”
According to Bhide, the easy monetary policy has helped sustain economic activities and recovery, and that such policy environment would be needed to strengthen and broaden the ongoing recovery process.
The second wave in many countries has been “sharp but short”, noted Ashima Goyal, MPC member. The effect on growth could be marginal if complete lockdowns and bans on interstate movement are avoided. The base-effect facilitated growth rate of above 10 per cent “does not imply sustained growth at potential.”
The growth rate would “barely take us to the level we had reached in 2019. We have to also make up for lost time; alleviate widespread job loss and income stress.”
Jayanth R Varma was more forthcoming, and said RBI’s forward guidance has “failed to flatten the yield curve”, and he saw “little merit in persisting with it anymore”. It was not prudent to “repose excessive faith in forecasts. Instead, the MPC must have the agility and flexibility to respond rapidly and adequately to whatever surprises new data may bring in future. Time based guidance is inconsistent with this imperative.”