MPC: Covid surge, lockdowns add uncertainty to growth outlook, says Das


The second one wave of coronavirus infections, and its affect on growth, loomed large on the minds of the six monetary policy committee (MPC) members, according to minutes of the meetings released by the Reserve Bank of India (RBI).

The members were also in favour of engaging with the bond market. One outside MPC member Jayanth R Varma ruled that RBI’s forward guidance has failed to cause down yields and that practice may also be stopped. The RBI announced bond buying worth Rs 1 trillion from the secondary market in the first quarter.

In any case, the MPC determined to retain the policy repo rate unchanged and the stance at accommodative “for so long as essential to sustain growth on a durable basis and continue to mitigate the affect of Covid-19 on the economy, while ensuring that inflation remains inside the target going forward.”

Edited minutes released showed that even as the RBI kept its growth forecast for the financial year unchanged at 10.5 per cent. On the other hand, most members were not very certain how the second one Covid wave would play out.

“Hastily rising cases of Covid-19 is the unmarried biggest challenge to ongoing recovery in the Indian economy,” RBI governor Shaktikanta Das said.

The economy was once evolving on the lines of the February MPC resolution with bettering demand conditions, investment enhancing measures by the government and bettering outside demand imparting an upside to growth prospects, but the recent hop in Covid-19 infections and its affect on economic activity had to be watched carefully.

The “need of the hour” was once to “effectively protected the economic recovery underway in order that it becomes broad-based and durable,” governor Das said, adding, “the RBI would take all steps, as needed, to make sure orderly conditions in the financial markets and to maintain financial stability.”

Deputy governor Michael Patra said the recent rise in inflation could be looked through while the point of interest could remain “on reviving the economy on a path of strong and sustainable growth.”

“An integral a part of this approach would be to insulate domestic financial markets from global spillovers and volatility in order that congenial financial conditions continue to beef up growth,” Patra said.

RBI’s executive director Mridul K. Saggar said the economic recovery could come under risk whether the new wave of infections was once not flattened soon, particularly as “monetary and fiscal policies have already used most of their space to substantially limit loss of economic capital.” Expansion of policy toolkits, though, could still have the funds for extra consolation, according to Saggar, who heads the monetary policy branch.

The upward thrust in infection could retard full normalisation by a quarter or two, and so ramping up vaccination, testing and remedy held the key to protecting economic recovery. Health policies have transform the first line of defence, while the “monetary and fiscal policies can only play a second fiddle.”

The baseline projection in growth of 10.5 per cent was once because of an “all-time low base,” he said, adding, 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.”

This given justification for the monetary policy’s continued beef up to growth, Saggar said, adding both consumption and investment had to be stimulated. Capacity utilisation rate at 66.6 per cent was once mannered below the long-term average of 73.6 per cent.

An upturn in capex cycle will require “larger public investments that can crowd in private investments,” and that consumption needed beef up from removing credit frictions and more redistributive policies, according to Saggar.

“The pace of recovery of output needed to offset the negative affect of the Covid 19 shock to the economy on the subject of growth in income and employment will be substantial and sustained over many years,” said outside member Shashanka Bhide.

According to Bhide, the easy monetary policy has supported in sustaining economic activities and recovery of growth, and that such policy surroundings would be needed to enhance and broaden the ongoing recovery process.

The second one wave in many countries have been “sharp but short,” famous Ashima Goyal. The effect on growth could be marginal whether total lockdowns and bans on interstate movement are have shyed away from, but the “nature of the virus and its ability to mutate imply too much unlocking can create a surge.”

The base-effect facilitated growth rate of above 10 per cent “does not imply sustained growth at potential,” she said. The growth rate would “barely take us to the level we had reached in 2019. We need to also make up for missing time; alleviate widespread job loss and income stress.” A sustained recovery can only be called a true recovery, according to Goyal.

She pointed out that the spread of the 10-year bonds over short rates remained approximately 60 basis points over 2011-17, but “the current spread of over 200 basis points, despite large OMO beef up, points to markets being caught in an irrational trap.”

“Indian markets also need firm and lucid guidance. Once market fears recede interventions required would minimize,” she prescribed.

Jayanth R. Varma was once more forthcoming, and said RBI’s forward guidance has “failed to flatten the yield curve,” and he saw “little merit in persisting with it any longer.”

The principal motivation for the forward guidance was once to minimize long term yields in the backdrop of an excessively steep yield curve. A flattening of the yield curve remained the most important goal but, “it will have to be pursued the use of other instruments which in large part lie outdoor the remit of the MPC.”

In the aftermath of the pandemic, forecasting has transform more difficult and “economic and statistical relationships have tended to collapse in the current exceptional surroundings.”

It was once not prudent to “repose over the top faith in forecasts. Instead, the MPC will have to have the agility and flexibility to reply hastily and adequately to whatever surprises new data may bring in future. Time based guidance is inconsistent with this vital,” Varma said.

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