MPC minutes: Economy struggling to regain momentum of H2FY21, says Das

The need of the hour is twofold: first, continue the monetary policy support to the economy; and second, remain watchful of any durable inflationary pressures, says RBI Governor

The resurgence in inflation in May and June above the upper threshold has reignited the debate on the appropriate monetary policy response, said RBI Governor Shaktikanta Das, according to MPC minutes released on Friday.

Reserve Bank of India released minutes of the August 4-6 Monetary Policy Committee meeting on Friday.

"The need of the hour is twofold: first, continue the monetary policy support to the economy; and second, remain watchful of any durable inflationary pressures and sustained price momentum in key components so as to bring back the CPI inflation to 4 per cent over a period of time in a non-disruptive manner.

"The economy is struggling to regain the momentum that had gathered in the second half of 2020-21. Many of current price shocks are likely to be one-off or transitory. Weak demand conditions and low pricing power are limiting the extent of their pass-through to output prices," said Das. 

The Governor said that many of current price shocks are likely to be one-off or transitory. Weak demand conditions and low pricing power are limiting the extent of their pass-through to output prices, he said. 

"There is still considerable slack in the economy. Domestic demand is picking up, but at a slow pace. Several supply side measures have been taken by the Government to deal with the inflationary pressures; however, more needs to be done. The daily new COVID-19 infections are sticky at around 40,000 cases per day. Possibility of a third wave looms somewhere in the horizon. On the whole, the economy still requires support in terms of maintaining congenial financial conditions and fiscal boosters. At such a critical juncture, can we really pull the rug and the let the economy tumble?," Das said.

Although investment demand is still anaemic, improving capacity utilisation and congenial monetary and financial conditions are preparing the ground for a long-awaited revival, he said. 

Narrative economics plays an important role in difficult times as even animal spirits are characterized by fat tails and can produce endogenous business cycle movements, said MPC member Mridul K Saggar.

"The latest available CPI numbers for June released in July, however, turned out to be antithetical, telling a very different story. First, the headline inflation surprised on the downside and stayed at 6.3 per cent with price levels dropping for several groups. It showed that May price spike may have been caused by fresh supply-side disruptions in the second wave and the month’s inflation number may have been biased upwards contaminated by data collection difficulties. Second, the momentum in June with a m-o-m increase of just 0.56 per cent was distinctly below the average momentum seen for the month. Third, the general increase in prices seen in May did not sustain in June and fewer items witnessed price increases during the month than is witnessed on an average," said Saggar.

"The highest priority now is to revive growth along a sustainable trajectory that becomes compatible with the inflation target as the pandemic recedes," said Michael Patra, RBI Deputy Governor.

The highest priority now is to revive growth along a sustainable trajectory that becomes compatible with the inflation target as the pandemic recedes. Core inflation may remain stubborn for longer due to disruptions caused by the

pandemic, overlaid with increases in margins and taxes, he said. 

"In India, my assessment is that headline inflation may persist at current elevated levels at least through the second quarter of 2021-22 before easing in the third quarter when the kharif harvest arrives in markets," said Patra. 

The high flux in elevated international crude prices remains a risk to inflation and to the terms of trade. It is

important to cushion the economy from this volatility through policy interventions, he said.

At its recent meeting, the MPC left the repo rate unchanged at 4 per cent while continued with the accommodative stance to revive and sustain growth on a durable basis.

The RBI retained the real GDP growth at 9.5 per cent in the current financial year. It has projected real GDP growth for Q1, Q2, Q3 and Q4 of FY'22 at 21.4 per cent, 7.3 per cent, 6.3 per cent and 6.1 per cent, respectively.

Analysts at Japanese brokerage Nomura said last week's review had signs of RBI policy pivoting towards normalization, pointing out to one of the members of the monetary policy committee also dissented against the "accommodative stance" and the increase in FY22 headline inflation target to 5.7 per cent.