The minutes of the Monetary Policy discussions held on 5th February were published on 22 February. An analysis of the arguments discussed in the meeting gave an insight into the condition and future projections of the economy. These minutes gave insight into the eventful discussions among the MPC members.
MPC committee is the RBI’s rate setting committee which on 4th February had kept the policy stance accommodative and repo rate unchanged at 4% , as long as it provided the needed boost to the economy. This move was hailed by the investors and the eminent economists who termed it as cooperative and growth oriented.
After a sharp fall in CPI inflation in December, it tapered further in January, indicating the accommodative stance. In addition to the falling CPI , the economy showed signs of good production and renewed investor confidence.
It has been reported that broadly, the MPC lauded that food prices had come down and the $400 billion stimulus had put the economy on a firm growth path. This gives an indication of strengthened and resilient supply chains in the economy.
However to the disappointment of the committee, while food inflation came down sharply, fuel inflation and core inflation skyrocketed.
The MPC minutes revealed that the RBI governor Shaktikanta Das stated that country’s economic growth momentum needs to strengthen further for sustained recovery. He added , “Growth, although uneven, is recovering and gathering momentum, and the outlook has improved significantly with the rollout of the vaccine programme in the country. The growth momentum, however, needs to strengthen further for a sustained revival of the economy and for a quick return of the level of output to the pre-COVID trajectory,” .
According to Shashank Bhide, the valuable member of the MPC committee, early indications from GDP growth and corporate results showed that the recovery in manufacturing was more robust than services. Services continue to face the sustained effect of the pandemic.
According to Bhide, the only way to ensure that manufacturing and services catch up with agriculture is via low rates and ample liquidity. The manufacturing also recovered faster in the first quarter due to the pent-up demand in the economy and the sustained festive season in India.
Hence, quarter 4 demand patterns will provide more insightful analysis on whether India faced a sustained recovery or not . Like others he too underlined the need for accommodative policy due to weak consumer confidence.
It is to be noted that India’s stock indices extended losses at the fifth straight session on Monday, indicating low investor confidence. The Sensex plunged 1145.44 points or 2.25%. The low investor confidence comes from the fact that India is again witnessing a surge in its COVID-19 positivity rate and Maharashtra again placing stringent lockdown in order.
The growth-oriented budget also posed as an uncertainty factor for the investors who felt that it will lead to rising inflation in the economy. Since market is based on speculation, investors speculate that to curb rising inflation, RBI will increase its repo rate leading to uncertainty in investors.
Briefings from the MPC meeting comes at the most opportune time which can soothe the investors’ nerves on the subject of unmoved repo rate. MPC committee maintains that for sustained growth and recovery , the accommodative stance would also continue in the next fiscal year and this is bound to revive investors’ confidence.
The MPC committee views the crisis as a tradeoff between the long term and the short-term risks. It maintains to evaluate a trade-off between which is bigger, near-term risk or the long term one. Quite rightly, a spike in inflation remains a risk but the bigger risk posed to economy is the growth recovery in the near term.
Shaktikanta Das has pointed out that the Indian economy flattered on the growth recovery and inflation front. He states that the union budget has called for sharp recovery in foreign portfolio investments and the positive market reaction. The export driven companies are likely to benefit and gain from IMF raising India’s growth projections to a significant 11.5% and hence continued accommodation would be the need of the hour.
In addition to IMF’s rating, oxford economics upped India’s growth forecast adding to the momentum. Das positively pointed out that the high-frequency data points like railway freight, air traffic, GST collections, steel consumption and e-way bills were picking up sharply.
But it is also to be noted that the committee fears the rising NPA ratio of the banking system in the near future. It’s quite rightly discernable that the accommodative stance of low repo rate and growth-oriented budget can only be maintained when the lending of the banks will rise. This in long term will have its effect on the mounting NPAs.
RBI had earlier projected the GNPAs of banks to rise to close top 15% by September this year in a worst-case scenario. Thus the accommodative stance projects a tradeoff between growth and the rising npa ratio in the economy. As ominous as both are, flattered economy and low growth pose a greater risk to India’s ambition of a 5 trillion economy.