‘Policy support key to sustain recovery’

Reserve Bank of India (RBI) Governor Shaktikanta Das said continued policy support is warranted for a durable, broad-based and self-sustaining rebound in economic activity.

These observations come in the backdrop of uncertainties vis-a-vis evolving global macroeconomic outlook and a slack in key drivers like private consumption on the domestic front.

Policy support is needed especially to nurture revival in sectors which are lagging and to safeguard those which are exposed to the evolving headwinds, as per the Governor’s observations at the monetary policy committee’s (MPC) meeting held between December 6 to 8.

“In this scenario, it would be prudent to watch out for growth signals becoming well entrenched while remaining vigilant on inflation dynamics. There is also a necessity to have a firm understanding of the impact of the Omicron variant,” Das said.

The central bank released the minutes of the six-member MPC meeting on Wednesday.

The Governor emphasised that the calibration and timing of a monetary policy response and preventing build-up of financial stability risks are very important in such an uncertain environment.

Global spillover

MD Patra, Deputy Governor, RBI, observed that India is being lashed by global spillovers. The main conduit has been financial markets so far but the channels themselves are diversifying.

“The biggest risk of contagion is now from the new variant. Unless a clearer picture emerges on the near-term outlook, we must take guard and resume battle readiness,” he said. Mridul K Saggar, Executive Director, underscored that one month’s data suggesting strong growth and inflation momentum is not sufficient to change rate cycles or policy stance.

“This guiding rule has helped us avert the mistake of premature tightening on at least two earlier occasions. This, however, does not mean status quo. Central bank has an armoury of tools to calibrate monetary and financial conditions,” he said.

Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad, the only MPC member to vote against continuing with the accommodative stance, observed that economic activity appears to have surpassed pre-pandemic level, continued recovery is likely during the rest of 2021-22, and the prognosis is for healthy growth in 2022- 23 as well.

On the other hand, there is increasing evidence of inflation becoming persistent in the upper region of the tolerance band, though it is projected to remain within the band. “In this environment, it is no longer appropriate to stick to the monetary policy stance...

“Raising effective money market rates quickly towards 4 per cent would demonstrate the MPC’s commitment to the inflation target, help anchor expectations, reduce risk premia, enhance macroeconomic stability, and allow lower long-term interest rates to be sustained for longer thereby aiding the economic recovery,” Varma said.

Pointing out that the repo rate of 4 per cent corresponds to a negative real rate in the range of 1-1.5 per cent based on forward looking inflation forecasts, Varma was of the view that this level of rates is currently appropriate for reviving economic growth without excessive risk of an inflationary spiral.

‘Be steady and watchful’

Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, said global risks are rising with the Omicron variant as well as with expectations of an earlier Fed taper. Markets are volatile as are oil prices. “In such circumstances it is better for the MPC to remain steady and watchful through the next couple of months,” she said.

Referring to the Survey of Professional Forecasters’ growth rate projection for Q3 and Q4 of FY22 at 6.6 per cent and 6 per cent, respectively, Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi, said achieving these growth projections in the face of concerns over the new variants of coronavirus and the return from accommodative monetary policy in the advanced economies suggest a need for policy measures supportive of growth drivers.

COMMENT NOW