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RBI Guv for keeping monetary arsenal dry for judicious use in future: MPC minutes


KOLKATA: Interest rate reductions for the rest of the year may be elusive given that almost all the six members of the Monetary Policy Committee harped on the need to keep the inflation within the mandated range and voted in favour of holding back the policy tools till a clearer picture emerges.

The retail inflation measured by the Consumer Price Index (CPI) rose to 6.93% in July on account of higher food prices, breaching RBI’s upper tolerance level of 6% for two consecutive months. The print for June was also revised to 6.23% from 6.09%.

Therefore, ‘inflation whipsaw’ can become the dominant factor in the next few meetings of the MPC which would rather wait to study the emerging growth-inflation dynamics before moving once again to push growth over inflation.

“Inflation surprises of recent months are undermining the MPC’s actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of COVID-19 on the economy. With inflation prints above the upper tolerance band, technical considerations under the monetary policy framework warrant a pre-occupation with dealing with the conditions of failure,” RBI deputy governor Michael D Patra was quoted as saying in the MPC minutes, released by the central bank on Thursday.

The 24th meeting of MPC was held from August 4 to 6 where all the members voted to keep the repo rate unchanged at 4%.

At the meeting, Pami Dua said that with inflation carrying upside risks, CPI inflation data for at least two or three more months would be crucial for clearly gauging the impact of supply side disruptions and demand conditions on prices.

“I also feel that we should wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads,” RBI Governor Shaktikanta Das said. “Given the uncertain inflation outlook, we have to remain watchful to see that the momentum in inflation does not get entrenched, which is also dependent on effective supply-side measures. As the economy continues to be in a fragile state, recovery in growth assumes primacy.”

The monetary authority has already front loaded repo rate cuts in its attempts to revive the economy, without success. Notwithstanding 250 basis points reduction in repo rate over the last year and a half, growth has steadily, forcing the members debate on how best monetary (and fiscal) policy may be used to achieve the goals of controlling inflation, smoothing out the business cycle, and limiting spurious economic volatility.

Since the outbreak of the pandemic, RBI lowered the repo rate by 115 basis points. One basis point is one-hundredth of a percentage point.

Rajendra H Dholakia said that the primary mandate given to MPC for inflation targeting at 4 percent with the upper tolerance limit of 6 percent has to be respected. “In fact, the confusion and uncertainty created by the imputed CPI-C and implied inflation estimates needs to be cleared by more regular readings on inflation rates,” he said.

RBI’s executive director Mridul K Saggar too voted for a pause. “Here is a sound rationale that monetary policymakers should do less under uncertainty. While pausing, it is best to retain the accommodative stance as long as the baseline suggests that inflation will soften to well within the tolerance band keeping in view the need to avoid frequent directional changes even as policy remains data dependent.”

Patra said that the economic outlook is grim and the recovery is likely to be slow and hesitant, with the situation likely to worsen before it gets better. “The upticks that easing of lockdowns yield are likely to be ephemeral and vulnerable to flattening out due to lack of underlying vigour,” he said.


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