Economic recovery from the pandemic remains incomplete and uneven, and continued support from various policies remains crucial for a sustained recovery, said Shaktikanta Das, RBI Governor.
The expected moderation in inflation trajectory over the next financial year provides room for monetary policy to remain accommodative, Das said in his statement to the Monetary Policy Committee (MPC).
The RBI on Thursday released the minutes of the latest MPC meeting, at which, all members unanimously voted to keep the policy repo rate unchanged at 4 per cent. Barring Jayanth R Varma, Professor, Indian Institute of Management (IIM), Ahmedabad, who wanted the policy stance to be shifted to neutral, the remaining five voted to keep the stance accommodative.
Adverse spillovers
Das cautioned that the adverse spillovers from divergent policy responses on the global front could materialise quickly on the global and domestic outlook. Policy making is getting increasingly complex in this environment, he added, while also underscoring that the renewed surge in international crude oil prices requires close monitoring.
“We need to remain watchful of the risks to domestic inflation arising from the rise in international commodity prices due to exogenous factors including geo-political developments,” he said.
IIM’s Varma observed that monetary policy acts with lags, and it is important to set policy looking at the expected state of the economy 3-4 quarters from now, and not in terms of where it is today. Referring to RBI’s projections showing growth running out of steam and inflation dropping close to the 4 per cent target towards the end of FY23, the professor said: “It appears to me that while real interest rates need to be remain low, they do need to become mildly positive during 2022-23.
“The fan charts also reveal a very large range of uncertainty on both inflation and growth ... with risks appearing to be balanced on both sides, the policy stance needs to be neutral.”
RBI Deputy Governor MD Patra observed that monetary policy is an instrument of stabilisation, the role of which is to align demand with supply, not the other way round. When inflation is driven by demand, monetary policy can stabilise inflation and growth. Patra highlighted that monetary policy cannot play its stabilisation role when inflation is the result of supply constraints.
“... Economic activity in India appears to have resiliently withstood the third wave, but messages from incoming high frequency indicators are mixed. It is prudent to assume that the recovery may have lost some momentum during Q4FY22 and Q1FY23,” Patra said.
Inflation appears to be approaching an inflection point after which it is projected on a downward path through all of 2022-23, he added.
‘Low aggregate demand’
Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, said: “That M3 (one of the measures of monetary and liquidity aggregates) and credit growth has remained in single digits since the pandemic struck, despite surplus durable liquidity, indicates that aggregate demand is low.
“Although the third wave of the pandemic seems to have passed with less economic cost, consumption continues at below pre-pandemic levels pointing to loss of income and demand.” She noted that despite continuing uncertainty there are signs of credit growth and investment picking up in some sectors. “This needs to be supported in order to sustainably reverse the decade long slowdown in private investment. It is necessary for the MPC to continue to stimulate demand at present. But not as much as earlier, because some recovery has taken place compared to last year,” she said.