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MPC Minutes: Guv pins hopes on Bharat, Patra feels growth focus disproportionate

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Member tells MPC Oct strategy to flatten bond yield curve a flop show

Government bond yields have continued to edge higher throughout 2021 amid concerns over a large supply of government bonds and inflation.

Reserve Bank of India (RBI) governor Shaktikanta Das sees the agriculture sector as a ray of hope amid the dark clouds of Covid-19 disruption. He said the rural economy is likely to remain robust, while industrial and services sectors may see only gradual recovery.

“The agriculture sector remains a beacon of hope. Rural indicators led by good monsoon, higher Kharif sowing and government-led initiatives to provide employment in the rural areas have shown sharp revival which, if sustained, can provide support to demand going forward,” Das told the Monetary Policy Committee (MPC) meeting held on August 4-6.

He said robust agricultural production would not only have a salutary impact on rural demand, but also should help ease inflationary pressure from food prices.

On the other hand, he thinks low capacity utilisation amid subdued domestic and external demand is likely to delay early revival of investment demand. As a result, the real GDP is likely to shrink in the first half of the year, and growth for the full year 2020-21 is likely to be negative.

Das further highlighted that the recent wholesale automobile sales data, electricity generation and issuance of e-way bills indicated that a moderate recovery was taking place in the domestic economy. However, the early signs of recovery in June following the gradual resumption of activity in the country have again slumped after a renewed spate of infections forced re-imposition of lockdowns in several states and cities.

The governor said considering the current market condition there is space for further monetary policy actions going ahead. “At this juncture, it is important to keep our arsenal dry and use it judiciously. We should wait for some more time for the cumulative 250 basis points rate reduction since February 2019 to seep into the financial system and further reduce interest rates and spreads,” he said.

Minutes of the MPC meeting released on Thursday showed all members unanimously voted to keep the policy repo rate unchanged and continue with the accommodative stance as long as necessary to revive growth and mitigate the impact of Covid-19 on the economy. They also expected inflation to remain within the target going forward.

The minutes showed Deputy Governor Michael Debabrata Patra believes that economic outlook is bleak. “A durable revival of the economy depends on sustained policy support,” he said, adding that from the time of the outbreak of the pandemic, the setting of monetary policy by the MPC has involved the assignment of a more than proportionate weightage to growth relative to inflation.

“The severe contractions in various sectors of the economy in the first half of 2020-21 so far vindicate this weighting scheme,” said Patra.

Here’s what other MPC members said at the RBI policy meeting:

Chetan Ghate

  • The economy has seen a gradual rebound in economic activity as much of the lockdown is being undone and policy constraints on the supply side are removed.
  • The worst is almost surely behind us (notwithstanding second waves of the pandemic etc).
  • Credit growth continues to remain muted despite large rate cuts.
  • Negative credit supply shock to the MSME sector may lead to a “credit-gap” and will have a bearing on growth.

Pami Dua

  • The headline inflation is expected to remain elevated in Q2FY21 and then moderate in the second half due to favourable base effects.
  • On the domestic output front, some signs of recovery were visible in June following the partial unlocking in some parts.
  • Some indicators of urban consumption demand–passenger vehicle sales, domestic passenger air traffic and consumer durables–picked up slightly but continued to remain in deep contraction.
  • Signs of recovery evident in indicators of rural demand like tractor sales, motorcycle sales and production of consumer non-durables.
  • High frequency indicators of investment demand remained weak, including consumption of finished steel, import of capital goods and capital goods production.
  • There are some signs of revival, but the restoration depends on how soon supply disruptions are repaired and demand revives.
  • The outlook for inflation is also uncertain, with risks more on the upside.

Ravindra
H Dholakia

  • There are some contradictory evidences about the current and future macroeconomic environment.
  • Transmission of the policy rate cuts to the money, bond and credit markets commendable but not complete; there is no harm in taking a pause at this juncture.
  • The available space for policy rate should now be used prudently to optimise the impact on the economic recovery.

Mridul K. Saggar

  • The depth of the gorge created by the unprecedentedly deep pandemic shock is difficult to measure.
  • With medical solutions yet to be found, it is difficult to anticipate the output loss that might occur from further waves of infections.
  • Growth estimates for 2020-21 are difficult to arrive at the current juncture, but there could be a downward bias to the present consensus estimates.
  • The recovery path is linked to the course the pandemic might take and complete normalisation will be difficult till pandemic is overcome.
  • High frequency indicators of real activity show that contractions have turned smaller in May and still smaller in June as activity recovers from the severe lockdown in April.
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