Members of MPC - Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged at 4 percent during the rate-setting meeting held from August 4-6.
The monetary policy committee (MPC) is conscious of its objective of anchoring inflation expectations, the MPC Minutes, that was released on August 20, read out.
The MPC also suggests that the outlook for aggregate demand is improving, but still weak and overcast by the pandemic. There is a large amount of slack in the economy, with output below its pre-pandemic level.
MPC’s current assessment was that the inflationary pressures during Q1 2021-22 were largely driven by the adverse supply shocks and are expected to be transitory. The MPC suggests that while the government has taken certain steps to ease supply constraints, efforts in this direction are necessary to restore the demand-supply balance.
Members of MPC - Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged at 4 percent during the rate-setting meeting held from August 4-6.
Prof. Jayanth R Varma had expressed reservations that the current levels of the reverse repo rate is no longer appropriate. He expressed that the current balance of risk and reward is gradually shifting as the pandemic continues to mutate and that merits a hard look at the accommodative stance.
Given how the COVID-19 has been inflicting major damage, Varma said, “The ability of monetary policy to mitigate a human tragedy of this nature is very limited as compared to its ability to contain an economic crisis.”
On how the broad sectors including MSMEs and certain segments have been impacted, Varma said, “Monetary policy is much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy. Indeed, monetary accommodation appears to be stimulating asset price inflation to a greater extent than it is mitigating the distress in the economy.”
Varma also pointed out that there are indicators and inflationary expectations may be becoming more widely entrenched and the target for MPC is 4 percent and not 5 or 6 percent as some comfort in inflation forecast was seen below the upper end of the tolerance bang.
Varma said in the minutes, “Treating 5% as the target would significantly increase the risk of inflation targeting failures.”
Pointing out the above three factors, Varma said, “I believe that the current level of the reverse repo rate is no longer appropriate. I am conscious of the fact that the MPC’s mandate is supposed to be restricted to the policy rate or the repo rate.”
He also suggests that the current repo rate of 4 percent corresponds to a negative real rate in the range of 1-1.5 percent based on forward-looking inflation forecasts.
“In my view, this level of rates is currently appropriate for reviving economic growth without excessive risk of an inflationary spiral,” Varma said.MPC minutes: Jayanth Varma says time to take a hard look at accommodative stance - Moneycontrol.com
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