Monetary arsenal must be kept dry for use: Das

Shaktikanta Das  

RBI Governor Shaktikanta Das had emphasised that although there was headroom for further monetary policy action, the ‘arsenal’ has to be kept dry and used judiciously for promoting growth, which has been hit hard by the COVID-19 pandemic, according to the MPC minutes released on Thursday.

All the six members of the Monetary Policy Committee (MPC) had opted for status quo and left interest rates unchanged.

“It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation as the staggered opening of the economy progresses, supply bottlenecks ease and the price reporting pattern stabilises,” Mr. Das said, as per the minutes.

The Governor noted that low capacity utilisation amid subdued domestic and external demand was likely to delay revival of investment.

Generalised inflationary pressures, in a situation where growth is expected to contract sharply, is a matter of serious concern, he added. “As I have been reiterating since October 2019, monetary policy is geared towards supporting the economic recovery process. Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously,” he said.

“We should wait for some more time” for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system, he added.

Deputy Governor and MPC member Michael Debabrata Patra said that even when the economy improved, the expectation was for a slow, hesitant recovery, with the situation likely to worsen before it gets better.

Upticks that easing of lockdowns yielded were likely to be ephemeral and vulnerable to flattening out due to lack of underlying vigour, he said.

External member, Ravindra H. Dholakia said there were high uncertainties regarding the macroeconomic environment.

“Although the present circumstances are truly exceptional, the primary mandate given to MPC for inflation targeting at 4% with the upper tolerance limit of 6% has to be respected,” he said.

‘In a minority’

External member Chetan Ghate said he had been advocating a more cautious path for policy rate reductions since February 2019.

“However, I have been in a minority in the MPC. Inflation has now been above the upper band of 6% for a number of months. Notwithstanding large rate cuts to spur growth over the last year and a half, growth has steadily declined despite 250 bps in cuts since February 2019,” Mr. Ghate said.

Future MPC meetings should not go soft on inflation, he added.