Economy needs more monetary stimulus, says Shaktikanta Das

Shaktikanta Das. File   | Photo Credit: PTI

Reserve Bank of India (RBI) Governor Shaktikanta Das, stating he had observed certain ‘green shoots,’ also acknowledged that the economy needed a further monetary stimulus, thus indicating the central bank was open to cutting interest rates. These are the minutes of the monetary policy committee (MPC) meeting held early in February.

The six-member MPC unanimously voted for status quo at the February policy review on the back of an uptick in inflation. The MPC decided to continue with the ‘accommodative’ stance.

“While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain,” said Mr. Das. The RBI had reduced interest rates by 135 basis points (bps) between February and October of 2019 before pressing the pause button in the next two policy reviews — in December and February 2020.

“Considering the overall evolving growth-inflation situation, it would be prudent to continue the focus on growth in the context of the expected moderation in inflation,” Mr. Das said, adding he was for maintaining ‘accommodative’ stance as long as necessary to revive growth.

Testing trade-offs

Deputy Governor Michael Debabrata Patra described the present situation as a tunnel of testing trade-offs and cautioned it may be a while before light was sighted. “.. the MPC has entered what I call the tunnel of testing trade-offs (TTT) and it may be a while before the light at the end of the tunnel is sighted,” Mr. Patra said.

Mr. Patra said he was for persevering with the accommodative stance till growth revived on a durable basis.

“Monetary policy will complement the fiscal impulse and boost it going forward,” he said.

Chetan Ghate, an external member of the MPC, highlighted the need for structural reforms as fiscal and monetary stimulus, so far, have been unable to revive economic growth.

“If growth hasn’t revived with a 135 bps cut in the policy rate, and a tax stimulus amounting to 1.2% of GDP, then the need of the hour is more structural reform,” Mr. Ghate said. Economic growth is estimated to slow to 5% for 2019-20.

He cautioned that fiscal deficit uncertainty may require the MPC to accept tighter-than-desired monetary conditions to ensure commitment to the medium-term inflation target.

Another external member Pami Dua cautioned on inflationary pressures due to disruptions in the supply of Chinese imports following the spread of COVID-19 which may exert pressure on prices of goods imported from that country.

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Printable version | Apr 17, 2021 5:02:15 PM |

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