HomeEconomy NewsMPC Minutes: 2nd wave of COVID-19 infection biggest risk to economy, says RBI governor

MPC Minutes: 2nd wave of COVID-19 infection biggest risk to economy, says RBI governor

RBI Governor says manufacturing and services sectors are normalising, real estate is showing signs of revival, and India's export and import were back to pre-pandemic levels

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By Ritu Singh  April 22, 2021, 7:11:14 PM IST (Published)

MPC Minutes: 2nd wave of COVID-19 infection biggest risk to economy, says RBI governor
Reserve Bank of India believes that the surge in COVID-19 infections is the single biggest risk to India's economic growth, minutes of the April monetary policy committee (MPC) meeting released on April 22 showed.


The MPC had left key rates unchanged amid rising uncertainty about the impact of the second wave of infections on growth and sustained rise in retail inflation in its last meet during April 5-7. All six MPC members had unanimously voted to keep the rates unchanged and continue with an accommodative policy.

"Rapidly rising cases of COVID-19 is the single biggest challenge to ongoing recovery in the Indian economy. Learnings of last one year should, however, help us in managing the crisis as it unfolds," RBI Governor Shaktikanta Das said, as per the minutes of the meeting.

The governor pointed out that various indicators showed recovery was on the lines of what the MPC projected in February. He noted that the agriculture sector remained resilient, manufacturing and services sectors were normalising, real estate was showing signs of revival, and India's export and import were also back to pre-pandemic levels.

"All these indicators suggest that the real GDP is evolving on the lines of the February MPC resolution. Improving demand conditions, investment enhancing measures by the Government and improving external demand impart an upside to growth prospects. The recent jump in COVID-19 infections and its impact on economic activity, however, needs to be watched carefully," said Das.

The governor reiterated that RBI has maintained ample surplus liquidity through conventional as well as unconventional measures, and that going forward, it would continue to ensure ample surplus systemic liquidity.

"The MPC's forward guidance over the past year has been helpful in anchoring market expectations; navigating the recovery from the crisis; and strengthening the pace of monetary transmission," Das highlighted. The move to a data-based forward guidance from a time-based one, Das highlighted, testified RBI's commitment to continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Professor Jayanth Varma, member of the MPC, elaborated, "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."

Click here for the key highlights from RBI's MPC meeting

"A flattening of the yield curve remains an important goal but, I think it must be pursued using other instruments which largely lie outside the remit of the MPC,” opined Varma.

Michael Patra, member of the MPC and Deputy Governor of the RBI also noted that economic recovery was still fragile, and concerns about inflation remained, as he voted for a status quo as well.

“Risks to the recovery have become accentuated since the MPC’s February meeting – new waves of infections and the inexorably slow pace of vaccinations; moderation in several high frequency sentiment indicators; global risks and spillovers. Monetary policy has to remain supportive of the economy until the recovery is more sure footed and its sustainability assured,” Patra said.

On inflation, Patra added, “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. Accordingly, I would continue to look through the recent elevation in inflation and remain focused on reviving the economy on a path of strong and sustainable growth.”

Other MPC members, Ashima Goyal and Shashanka Bhide- also highlighted risks to growth and inflation both. “The improvement in growth performance in the final two quarters in FY21, therefore, is fragile and will require strong policy support for broadening and sustaining positive momentum. The external demand conditions also point to uncertainty although growth in some of the advanced economies is expected to improve,” said Bhide.

“Even the above ten per cent growth most analysts still expect for 2021-22, however, will barely take us to the level we had reached in 2019. We have to also make up for lost time; alleviate widespread job loss and income stress. Expected growth is high because of the base effect and does not imply sustained growth at potential. Only when we reach the latter will true recovery have taken place,” Goyal noted.

Mridul K Saggar, Executive Director at RBI and member of the MPC warned that there was risk in too much focus on asset prices in the conduct of monetary policy. “Credit channel that works in tandem with interest rate channel is far more important than the asset price channel for effective monetary transmission. Countries have certainly relied on negative nominal or real rates in an attempt to avert deep recessions. In part they have helped limit job losses and scarring. However, these benefits have to be weighed against the low interest rates fuelling K-shaped recoveries with increased inequalities and inflicting financial repression for savers. Also, there are added macroeconomic risks for countries where inflation is not as dampened as in Advanced Economies that are resorting to unconventional policies,” he said.
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