NEW DELHI: The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) believes that the dramatic surge in COVID-19 infections is the single biggest risk to India's economic growth, according to the minutes of the latest policy meeting released on Thursday.
The spike in the daily new cases and the associated localised lockdown could dampen the demand for contact-intensive sectors, slow consumption demand and large investments, restrain growth impulses and prolong the return to normalcy, the members said, justifying their decison to opt for an accommodative stance to support the still-fragile growth.
"Improving demand conditions, investment enhancing measures by the government impart upside to growth prospects. The rapidly rising cases of COVID-19, however, is the single biggest challenge to ongoing recovery in the Indian economy" said RBI governor Shaktikanta Das, adding that the need of hour is to effectively secure the economic recovery underway so that it becomes broad-based and durable.
All six MPC members had unanimously voted to keep the rates unchanged at 4 per cent during its April meeting, amid rising uncertainty regarding the impact of the second wave on growth and sustained rise in retail inflation. For 2021-22, inflation rate is projected at 5 per cent, taking into account both the upside and downside pressures.
Among other members, Mridul Saggar felt that the localised lockdowns could push growth normalisation further out by a few more quarters, while Ashima Goyal stressed the need to expand RBI’s balance sheet further to buy government securities so as to keep financial conditions in check.
Shashanka Bhide, too, saw the improvement in growth in the second half of FY21 as fragile and agreed with Das on the need for a broad-based recovery, covering all the production sectors and the micro, small and medium enterprises and employment to support consumption demand, to sustain economic revival.
RBI deputy governor Michael Patra, meanwhile, said that the demand pull was still weak and that moderation in several high-frequency sentiment indicators remains a matter of concern. Risks to the recovery have become accentuated since the February meet, he added.
On price instability, Patra noted that the inflation print of February reflects pandemic effects in the form of input cost pressures - though still muted in translating into selling prices - retail margins and increased costs of doing business as supply chains are still mending. "...the monetary policy has to remain supportive of the economy until the recovery is more sure footed and its sustainability is assured,” he said.
Saggar also added that the economic recovery is "beginning to lose some steam" and can come under risk if this new wave of infections is not flattened soon. "This is especially so as monetary and fiscal policies have already used most of their space to considerably limit loss of economic capital, though expansion of policy toolkits can still afford additional comfort. Learning effects on calibrating stringency of restrictions may keep economic costs of the second wave much lower than the first but still retard full normalisation by a quarter or two," he explained.
He observed that the capacity utilisation at 66.6 per cent remains below the long-term average of 73.6 per cent.
While most economists still expect growth to be above 10 per cent, the MPC members believe that this high growth will be essentially because of an all-time low base. According to Saggar, the realisation of the projected growth will translate to only a meagre average growth rate of 0.85 per cent in two years following 2019-20.
Meanwhile, it also appears the shift from a time-based to a state-based guidance is interpreted by some members as a move to reduce policy uncertainty.
That apart, the RBI also refrained from giving any explicit forward guidance. "From my perspective, the principal motivation for the forward guidance was to reduce long term yields in the backdrop of an excessively steep yield curve. Unfortunately, forward guidance has failed to flatten the yield curve, and I see little merit in persisting with it any more," noted Professor Jayanth Varma.
Varma opined that forecasting has become difficult in the aftermath of the pandemic. "The MPC must have the agility and flexibility to respond to data instead," he concluded.