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RBI MPC minutes reveal committee felt constrained by its mandate, was forced into standstill

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In the words of its member and RBI deputy governor Michael Patra, the monetary policy was “forced into standstill” thanks to its inflation-targeting mandate.

The very last policy meeting of India’s first ever Monetary Policy Committee (MPC) ended on a rather somber note. In the words of its member and RBI deputy governor Michael Patra, the monetary policy was “forced into standstill” thanks to its inflation-targeting mandate.
All six members of the MPC - three external members that will now retire, and three internal RBI members that will continue- unanimously voted to keep the policy repo rate unchanged on August 6. This, as concerns about price rise in the economy loomed large, which is the MPC’s primary mandate as per the agreement with the central government.
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The Reserve Bank of India (RBI) has now released minutes of this last MPC meeting which was held between August 4-6. It shows why the MPC felt constrained and could not reduce rates despite the space for policy support. This is what each of the members had to say.
Shaktikanta Das, RBI governor
The governor called for proactive sector-specific supply-side measures to contain inflationary tendencies. "The generalised inflationary pressures across food and CPI excluding food and fuel, in a situation where growth is expected to contract sharply, is a matter of serious concern, he noted.
Das acknowledged the headroom for further monetary policy action, but said it was important to "keep our arsenal dry and use it judiciously". He also noted that the MPC must wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system before it acts.
"Given the uncertain inflation outlook, we have to remain watchful to see that the momentum in inflation does not get entrenched, which is also dependent on effective supply-side measures," the governor cautioned. Recovery in growth assumes primacy, Das said, adding that the economy continues to be in a fragile state, recovery in growth assumes primacy. He voted for a pause, with an accommodative stance to indicate space for further action in future.
Michael Patra, DG, RBI
Patra argued that with inflation above the upper tolerance band of the MPC, the committee was constrained due to technical reasons.
"Monetary policy is forced into a standstill even when there is space available to persevere with its commitment to reinvigorate growth momentum and alleviate the effects of COVID-19. In fact, if inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by mandate to undertake remedial action, including an immediate and more than proportionate response to head off the build-up of inflation pressures and prevent it from getting generalised," Patra opined.
"The outlook is grim; even when it improves, the expectation is one of slow, hesitant recovery, with the situation likely to worsen before it gets better," he noted. He said any durable revival of the economy depends on sustained policy support, which underscores the urgency of unshackling monetary policy from extraneous non-pandemic constraints. "In the absence of this coordinated strategy, monetary policy will be left with no option but to adhere to its primary mandate of the MPC, which is after all, achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," Patra said. He also voted for a status quo.
Mridul Saggar, ED, RBI
In his debut MPC meeting, Saggar said policy needs to be mindful of the space that may be needed to deal with possibility of increased stress that may resurface later with loan defaults and recognition of bad loans. He added that the impact of fiscal actions and space also needs to be closely observed for demand management. "Growth is at risk over the medium term if we sacrifice macro-financial stability for short-run expediency. Moreover, there is sound rationale that monetary policymakers should do less under uncertainty." He, therefore, chose to vote for a pause.
Chetan Ghate, Professor, Indian Statistical Institute
Ghate voted to keep policy rates unchanged, with an accommodative stance. He believes it would be opportune to wait and watch to see how the growth- inflation numbers pan out over the next few months before taking any action. Ghate noted there are downside risks to growth due to COVID, even as he urged the government to not waste the crisis. "The government must continue to focus on much needed structural reforms. Some fiscal space should be reserved for later outbreaks," he said.
"I should mention that I have been advocating a more cautious path for policy rate reductions since February 2019. However, I have been in a minority in the MPC. Inflation has now been above the upper band of 6 per cent for a number of months. Future, MPCs should not go soft on inflation. Going forward, monetary (and fiscal) policy will be needed to be used wisely with a clear understanding of what and what not they can achieve in terms of controlling inflation, smoothening out the business cycle, and limiting spurious economic volatility."
Pami Dua, former director, Delhi Schoool of Economics
Dua also agreed that it was best to adopt a wait and watch strategy and look forward to incoming data to assess the evolving macroeconomic situation. She also referred to the dilemma the committee was faced with. "Clearly, it is important to revive the economy and mitigate the impact of the COVID-19 pandemic, in line with the objective of monetary policy – to maintain price stability while keeping in mind the objective of growth. It is thus prudent to continue with the accommodative stance of monetary policy. At the same time, the mandate of the MPC is to achieve the target of CPI inflation of 4 per cent with the upper tolerance limit of 6 per cent and the lower tolerance bound of 2 per cent," Dua said. With inflation outlook uncertain, Dua voted to leave rates unchanged.
Ravindra Dholakia, former professor, IIM Ahmedabad
Dholakia raised concerns about the deep stagflationary conditions prevailing in the country. "Although, the present circumstances are truly exceptional, the primary mandate given to MPC for inflation targeting at 4 percent with the upper tolerance limit of 6 percent has to be respected," he said, echoing the sentiment expressed by the other members. Dholakia said inflation outlook was uncertain, and needed further monitoring before policy action could be taken. "I have strong reservations in accepting the implicit inflation numbers for April and May announced by the NSO. I would, therefore, like to wait and watch for more reliable and realistic estimates of the headline inflation before taking any decision on the policy rate." He voted to keep rates unchanged.

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