The meeting minutes of last Thursday showed that increasing inflation has involved the task of India’s monetary policy committee and could restrict the ability to hold up the growth, while it also called on the government for better fiscal action. On August 6th, the MPC decided to hold interest rates steady while keeping its stance accommodative as long as necessary to revive growth. It reduces the impact of Covid-19 while ensuring the inflation remains within the target. Despite the dovish tone, the minutes suggest the bank has less scope for rate cuts in the present scenario.
According to deputy governor Michael Patra, he wrote that the inflation surprises of recent months are undermining the MPC’s actions and stop its resolve to do what it takes to revive growth and reduce the impact of Covid-19 on the economy. Almost all members highlighted the uncertainty on the inflation front and therefore the need for more fiscal measures that might help the economic recovery because the MPC’s hands are tied due to its inflation-targeting mandate.
The MPC is mandated to sustain inflation at 4 percent over the medium term and stay it within a 2 percent to 6 percent range at all times. A breach of this band for 3 straight quarters would require the committee to supply evidence to the authorities. Inflation has remained above this home in the last two quarters. Patra added that the monetary policy is forced into a standstill even when there is space available to persevere with its commitment to sustainable growth momentum and alleviate the effects of Covid-19. If inflation kept above the upper tolerance band for another quarter the committee must by mandate undertake remedial action to explode the increase of inflation pressures and prevent it from getting generalized.
Chetan Ghate, MPC member wrote this should be a crisis that is not wasted. The government must still specialize in much needed structural reforms. Some fiscal space should be reserved for later outbreaks. Almost all members in the meeting said that growth remains week, then the forecast of accurate growth isn’t possible at the instant point, the country was likely to ascertain a significant contraction in 2020-21, making it hard to completely ignore the risks to growth. The Indian economy is likely to contract this quarter and next, according to a recent Reuter’s poll. The RBI governor Shakthikanta Das wrote that, even though there is headroom for further monetary policy action, at this juncture it’s important to stay arsenal dry and use it judiciously.
