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The Monetary Policy Committee risks damaging its credibility when it uses words that do not accurately reflect what it means, cautioned Jayanth R Varma, Member (External), MPC.
While voting, along with other five members of MPC, in favour of the resolution to keep the policy repo rate unchanged at 4 per cent, Varma, a Professor of IIM-A, was the lone voice against the ‘formulation’ of the resolution.
According to the minutes of the MPC meeting (October 7-9), Varma disagreed with the MPC’s formulation: “The MPC 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 — to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.”
Varma emphasised that his formulation of the forward guidance would have been: “The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth... The MPC expects to maintain a low policy rate and an accommodative stance during the current financial year and well into the next financial year.”
The MPC member observed that in a world that is full of unpleasant surprises, the MPC must of necessity be data driven.
“Covid-19 was an example of a totally unanticipated growth shock that came out of nowhere. If a similarly unforeseeable inflation shock were to hit the economy, I find it hard to believe that the MPC will remain accommodative.”
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Das speak
RBI Governor Shaktikanta Das said that the “Monetary Policy at this stage has to provide adequate support to ensure a robust revival of the economy from the devastating effects of Covid-19, while at the same time ensuring that any persistence of elevated inflation does not lead to unanchoring of inflation expectations.”
MD Patra, Deputy Governor, RBI, warned that if the NSO’s provisional estimates for Q2 that are expected at the end of November corroborate at least the direction of MPC’s forecasts, India has entered a technical recession in the first half of the year for the first time in its history.
Nonetheless, if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-Covid level by the end of 2020-21 and it may take years to regain this lost output, he said.
“In the current milieu, however, both monetary policy and fiscal policy in India face tightening constraints, some idiosyncratic. For fiscal policy, it is the collapse of tax revenue — by 32 per cent in the first quarter…For Monetary Policy, it is the persistence of headline inflation above 6 per cent for the third month in succession,” Patra said.
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