The Monetary Policy Committee (MPC) voted to give growth a chance to claw its way back into the sunlight, according to an article in the Reserve Bank of India’s latest monthly bulletin.
The MPC’s decision -- to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4 per cent and continue with the accommodative stance -- is backed by all available evidence – mobility-, activity- and survey-based, according to the article ‘State of the Economy’.
“Yet it is, in the ultimate analysis, a judgement call because at the heart of the association between growth and inflation, a sacrifice is embedded,” according to the article put together by 23 RBI officials, including Deputy Governor MD Patra.
The authors observed that a reduction in the rate of inflation can only be achieved by a reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere.
“Called the sacrifice ratio in economics, the latest estimates for India suggest that for a one percentage point reduction in the rate of inflation, 1.5-2 percentage points of GDP growth have to be foregone,” assessed the authors.
The authors posed the question: “But what if the MPC doggedly attacks the supply shock induced price pressures in spite of the current state of the pandemic-ravaged economy and as a consequence, economic activity wilts into depression?”
The authors emphasised that no amount of humility will wipe away the tears then.
“Also, our MPC is India-focused; it has to be. It must choose what is right for India, emulating none, not emerging nor advanced peer,” they added.
The article noted that so far, inflation is on track to staying within the trajectory envisaged (average 5.7 per cent in FY22) and it is likely to stabilise during the rest of the year.
“In our view, this is a credible forward-looking mission statement for the path of inflation,” the authors said.