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Citizen's MPC: RBI has little flexibility on rate side; vaccination pace key to removing uncertainty

Updated : June 04, 2021 06:48:43 IST

The Reserve Bank of India’s (RBI) second Monetary Policy for the year, which is due on Friday, comes against the backdrop of decline in growth. The country has recorded its sharpest contraction in 40 years, and for the current year, GDP downgrades are flowing fast. Yet, globally, the inflation scare is also growing by the day. Under these circumstances, what will the Monetary Policy Committee (MPC) do?

CNBC-TV18’s Citizen's Monetary Policy Committee’s Chairman Pronab Sen, and the Former Chief Statistician said that the MPC has very little flexibility on the rate side. He also added that the MPC has missed the bus by not moving to a neutral stance.

According to Samiran Chakraborty, the Chief Economist at Citi, the Central Bank can only review stance once the Diwali season is over. He also said that the Monetary Policy still has a role to support fiscal policy, and should do whatever it takes to sustain fiscal deficit with lower rates. “We have now more certainty that the negative output gap is going to persist for a longer period, and in that context, RBI can start the normalisation process only after the festive season gets over. That window, RBI can clearly indicate through a time-based guidance, which would keep the short end well anchored. So, both, the government security acquisition plan (G-SAP) and the time-based forward guidance, are additional monetary policy tools that can be used in the June meeting,” he said.

Sonal Varma, Chief India Economist and Asia Ex-Japan at Nomura, said that there is uncertainty on the path out of the second COVID wave. However, she believes that the uncertainty will come down as the COVID-19 vaccination drive picks up. “There is uncertainty on the path out of the second wave before vaccinations actually lead to herd immunity. So, there is still a tremendous amount of uncertainty in terms of the growth path,” she said.

Sajjid Chinoy, the Chief India Economist at JPMorgan, too opined that the impact of uncertainty will linger in the coming months. However, he said that in the near term, the focus will be on growth.

Soumya Kanti Ghosh, the Group CEA at SBI, said that borrowing of the central government and states has been on the lower side in the first two months, but is likely to go up in the coming months. However, he believes that it is going to be a tremendous task for the RBI to maintain a balance.

For the full discussion, watch the video.
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