The dent on economic activity due to the second wave of the pandemic during April-May necessitated continuation of monetary measures to support the process of economic recovery to make it durable, Das had said while participating in the meeting of the Monetary Policy Committee (MPC) earlier in the month.
“Overall, the second wave of Covid-19 has altered the near-term outlook, and policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to normalcy,” Das said, as per the minutes of the meeting released on Friday.
Going forward, the governor said the pace of vaccination and the speed with which the second wave can be brought under control will have considerable bearing on the evolving growth as well the inflation trajectory.
The Reserve Bank remains committed to undertake pro-active conventional and unconventional measures and to effectively channelling the systemic liquidity to alleviate stress of critical sectors which have borne the brunt of the second wave, he said.
Das, and the other five members of the MPC — Shashanka Bhide, Ashima Goyal, Jayanth R Varma, Mridul K Saggar and Michael Debabrata Patra — had voted for keeping the policy repo rate unchanged at 4 per cent.
RBI deputy governor Patra observed that unlike in the first wave, supply conditions have remained relatively resilient in the second wave, but aggregate demand barring net exports has been dented and needs counter-pandemic policy support.
Even the turnaround in net exports is fragile and heavily dependent on the strength of the vaccination propelled revival in external demand, which may be partially offset by the terms of trade loss on account of the rise in international commodity prices, particularly crude oil, he noted.
Patra further said the MPC has created the necessary conditions for supporting growth by maintaining the policy rate at its lowest level ever.
“The onus is on the Reserve Bank to operationalize the MPC’s guidance on an ongoing basis by ensuring congenial financial conditions across the system as well as for specific sectors, instruments and institutions,” he said.
RBI executive director Mridul K Saggar said the solace is that economic growth has not fallen off the cliff in Q1 as it did a year ago.
It is possible that that initial GDP estimates do not provide full visibility and the impact on informal and unorganised economy may be deeper, he said.
Also, if the economy does expand by 9.5 per cent this year, the output level in 2021-22 will be just 1.6 per cent higher than in the pre-pandemic year 2019-20, he added.
He further said inflation is expected to stay elevated from the target but below the upper tolerance level through the year. The government has tasked the RBI to retain inflation at 4 per cent with a margin of 2 per cent on either side.
External MPC member Jayanth R Varma said inflation rates have been consistently well above the mid point of the tolerance zone for an extended period and are forecast to remain elevated for some time.
“Moreover, survey data and other indicators show that businesses have no difficulty in passing on cost increases to consumers, and are able to maintain (and even expand) their margins,” he said.
The only source of comfort is that all the evidence at the moment suggests that inflation is being driven not by domestic demand, but by supply side factors including the global surge in commodity prices, Varma added.
Ashima Goyal said the slump in consumer confidence in the second wave is slightly more than that in the first wave. It had, however, recovered to July 2019 levels in January 2021, and may show a similar V-shape this time.
“It is not yet clear if higher risk-aversion will dampen consumer demand more now or there will again be a desire to make up for forced abstention. But income and job loss, more indebtedness and impoverishment surely will shrink demand,” she said.
Goyal further said there is room for a supportive limited counter-cyclical rise in government deficits. This together with visibly better tax performance will prevent spikes in risk premium and help monetary policy keep real interest rates at levels that sustain the growth recovery.
Growth rates that exceed the real interest rate bring down debt ratios over time, she said.
As per the minutes, Shashanka Bhide said while the uncertainty over the short-term growth prospects has increased, there are also the positive triggers. The improved global demand conditions are expected to support the sustained improvement in export performance.
“The focus on improving capital expenditure in the central government budget also provides a stimulus to domestic demand,” Bhide said, adding that agriculture is expected to contribute to economic growth based on a favourable monsoon.
The member said he was voting in favour of continuing with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continuing to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.