All six members of the monetary policy committee (MPC) were on the same page with regard to strengthening the ongoing economic recovery even as a majority of them flagged the persistence in core inflation, according to the minutes of the MPC.

At its meeting held on February 5, the MPC decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4 per cent.

It also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year. The Reserve Bank of India (RBI) released the minutes of MPC meeting on Monday.

Economic recovery

According to Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi, accommodative monetary policy stance is needed to strengthen ongoing economic recovery, enabling expansion of both output and demand.

“Easing of the pressures in the non-food sector will require easing of some of the key input costs such as transportation services and energy, both by improved supply conditions and productivity.

“Easing the price pressures in the non-food sector will be required to achieve revival of consumer demand as well,” said Bhide.

Ashima Goyal, Professor, Indira Gandhi Institute of Development Research, Mumbai, observed that although growth has turned positive, output levels remain below 2019 levels.

“Excess capacity continues, supply chains have room to normalise much further, and unemployment rates have increased despite a recovery in employment, because of the rise in labour participation rates as willingness to work rose with the waning of Covid-19 fears,” said Goyal.

Data waited

She observed that while corporate India has done well, and consumer confidence is reviving, reliable data is still awaited on the resilience of the informal sector.

“The current macroeconomic configuration and its expected future evolution...implies there is space for the MPC to continue to support the revival of the economy with inflation remaining in the target band,” Goyal said

Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad, noted that with both inflation and growth outcomes being well within the range of expectations of the MPC, and short term interest rates being within the corridor defined by the repo and reverse repo rate, “there is nothing to be done and there is nothing to be said as of now”.

Mridul K Saggar, Executive Director, RBI, said as growth is still fragile, support to it must be extended into Q1 (April-June):2021-22 and longer if necessary, though with risk of a re-calibration in some scenarios such as one in which core inflation momentum picks up further.

Michael Debabrata Patra, Deputy Governor, RBI, felt that consumer and business confidence is either cautiously returning to expansion or already in it. These developments vindicate the stance of monetary policy.

“Overall, the near-term outlook for inflation appears less risky than the near-term challenges for growth which warrant continuing policy support, at least until the elusive engine of investment fires, and consumption, the mainstay of aggregate demand in India, stabilises.

“Tradeoffs facing the conduct of monetary policy may become sharper in the near-term, however,” said Patra.

Shaktikanta Das, Governor, RBI, said growth, although uneven, is recovering and gathering momentum, and outlook has improved significantly with the rollout of the vaccine programme in the country.

The growth momentum, however, needs to strengthen further for a sustained revival of the economy and for a quick return of the level of output to the pre-Covid trajectory, he added.

“The sharp correction in food inflation has improved the near-term headline inflation outlook, although core inflation pressures persist.

“Given the sharp moderation in inflation along with a stable near-term outlook, monetary policy needs to continue with the accommodative stance to ensure that the recovery gains greater traction and becomes broad-based,” said Das.

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