Reserve Bank of India (RBI)
Reserve Bank of India (RBI)

The Reserve Bank's Monetary Policy Committee members, in their meeting on August 6, expressed concerns over the economic recovery process which has been hindered by a number of factors, including the re-imposition of lockdowns in several states and cities.

The minutes of the MPC meet revealed that majority of members also cited high consumer inflation as a matter of concern.

In the meeting, RBI Deputy Governor Michael Debabrata Patra said: "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. The upticks that easing of lockdowns yield are likely to be ephemeral and vulnerable to flattening out due to lack of underlying vigour."

"A durable revival of the economy depends on sustained policy support to resuscitate activity in various sectors, restore employment and livelihood to the displaced and dispossessed, continue to assure health support and pursuit of the vaccine, ease financial stresses facing households, businesses and financial intermediaries, instil confidence and anchor financial stability before it slips away."

"This underscores the urgency of unshackling monetary policy from extraneous non-pandemic constraints, emerging out of inadequate and lagged reactions in terms of supply management. 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."

Another member Ravindra H. Dholakia was quoted as saying in the MPC minutes: "After the last MPC meeting in May 2020, changes in the economic environment were along the expected lines except the official announcement about the headline CPI and implicit inflation numbers during April, May and June. These high inflation prints coupled with the apprehensions about GDP growth likely to be negative both in real terms and nominal terms would imply that the economy is not caught up in recession with deflation but in a deep stagflation, which occurs when the adverse supply shock is more severe than the demand shock."

"Under such circumstances, expansionary aggregate demand policies - both monetary and fiscal - would result first in fuelling inflation further rather than output and employment expansion and growth recovery, which is expected under recession with deflation. 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."

MPC member Pami Dua said: "In its attempts to revive the economy, the MPC has already front loaded cuts in the policy rate. In fact, before the Covid-19 pandemic hit the Indian economy, the policy repo rate was reduced by 135 basis points between February and October 2019 in response to the slowdown in economic activity."

"The monetary policy transmission to lending rates of banks has also improved, with a 91 basis points decline in the weighted average lending rate (WALR) on fresh rupee loans between March and June 2020. However, at the present juncture, the outlook for inflation is also uncertain, with risks more on the upside. Some clarity is also required with respect to the imputation of the April and May prints. In this context, CPI inflation data for at least two or three more months will be crucial for clearly gauging the impact of supply side disruptions and demand conditions on prices."

RBI Governor Shaktikanta Das said: "The outlook for the domestic economy remains extremely uncertain as the impact of Covid-19 is more severe than initial assessments and the global economy remains vulnerable to renewed surge in community infections and fears of a second wave."

"Lately, however, it is seen that the nascent 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 agriculture sector remains a beacon of hope."

Consequently, to curb the rise in inflation, and stabilise the general economic environment, the Reserve Bank on August 6 retained its key short-term lending rates, but maintained its growth-oriented accommodative stance.

The MPC of the central bank maintained the repo rate -- or short-term lending rate for commercial banks, at 4 per cent.

Likewise, the reverse repo rate stands unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.25 per cent.

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