The minutes of the June 4 monetary policy released on June 18 showed a few members expressing concerns about growth and inflation outlook. This, even as they chose to look-through the concerns to support growth by keeping rates steady.
Amid concerns of inflation breaching the central bank’s comfort zone, the Reserve Bank of India Governor Shaktikanta Das said that the MPC’s “unambiguous” commitment remains on revival of growth amid the pandemic, the minutes showed. To be sure, the comments came much before the latest retail inflation data was published, at a six-month high of 6.30 percent in May, above RBI’s target range of 2 to 6 percent. Another key factor that may have influenced the MPC’s policy decision was the US Federal Reserve’s stance, which was only revealed after the policy.
“The emphasis should be to continue with accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. In this context, the phrase ‘to revive’ needs to be brought in so as to strengthen the forward guidance and demonstrate the unambiguous commitment of the MPC to revive and sustain the growth process,” RBI Governor Shantikanta Das said.
The tone of the minutes was largely in line with the monetary policy action of June 4, with a clear focus on growth over other concerns.
While the Monetary Policy Committee (MPC) of the central bank said it would look through the current inflation surge, a few members cautioned about the rising global fuel prices and elevated inflation expectations.
RBI deputy governor and member of MPC, Michael D Patra flagged concerns over elevated energy prices as the key risk to inflation. “The outlook for energy inflation is the main upside risk, especially as the timing and magnitude of reflation of global demand to pre-pandemic levels is uncertain. This warrants close and continuous watching, with preparedness to take countervailing action in the form of duty/tax reductions. The recent initiative of a Group of Ministers monitoring supply conditions with greater intensity is a welcome step in the right direction and should be matched by proactive actions as necessary to deflect imported input costs from adding to inflationary pressures,” Patra said.
Mridul Saggar, member of the MPC, noted,” As a baseline, inflation is expected to stay elevated from the target but below the upper tolerance level through the year. However, the probability distribution indicated in the fan chart shows that risks of breaching the upper tolerance level are not insignificant. But for the extra-ordinary circumstances that prevail, we would have moved to a neutral stance long back....There are risks to inflation as there have been general price pressures at the WPI level and its inflation as well as its momentum is at its highest for the index with the current base. "
Another MPC member, Professor Jayant Varma also noted that the committee must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long. “The MPC has been able to maintain monetary accommodation in the face of above-target inflation mainly because of its hard-earned credibility for successful inflation targeting. To maintain and enhance this credibility, the MPC needs to remain data driven so that it can respond rapidly and adequately to any unforeseen shocks that may arise in future,” he said.
WPI and CPI data released post the June 4 policy showed a surprising rise in price pressures. While May CPI inflation was at a six-month high, WPI inflation at 12.9 percent was the highest since 1992.
“Going forward, agriculture is expected to be the bright spot in the current year as well after remaining the fulcrum of growth during 2020-21,” Governor Das said in his statement.
“The central government capex, which is budgeted to expand at a robust pace for 2021-22 (overall capital expenditure is budgeted to increase by 30.5 per cent within which capital outlay is budgeted to increase by 63.4 per cent) along with infrastructure pipeline, should reignite investment cycle once restrictions are eased. As the vaccination coverage expands, the pent-up demand for contact-intensive services is likely to rebound sharply,” Das said.
On June 4, all six members of the MPC had voted to keep repo rates unchanged at 4 percent, and also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.