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

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.