Interest rates status quo due to uncertainty: RBI’s monetary policy committee

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Mumbai: The uncertainty created by the jump in COVID-19 infections and localised lockdowns prompted RBI Governor Shaktikanta Das and other members of the rate setting panel MPC to unanimously vote for status quo in interest rates and an accommodative policy stance to support growth, as per minutes of the meeting released on Thursday.

“The need of the hour is to effectively secure the economic recovery underway so that it becomes broad-based and durable,” the Governor said during the three-day meeting of the Monetary Policy Committee (MPC) which ended on April 7.

Recovery important

The renewed jump in COVID-19 infections in several parts of the country and the associated localised and regional lockdowns add uncertainty to the growth outlook, he observed, as per the minutes of the meeting released by the central bank.

“In such an environment, monetary policy should remain accommodative to support, nurture and consolidate the recovery. We need to continue to sustain the impulses of growth in the new financial year 2021-22,” Das argued. The MPC, consisting of Das, Michael Debabrata Patra (RBI Deputy Governor), Mridul K Saggar (RBI Executive Director) and three external members — Shashanka Bhide, Ashima Goyal and Jayanth R Varma — had voted in favour of retaining the repo rate unchanged at 4%.

Supportive policy

Patra said monetary policy has to remain supportive of the economy until the recovery is more sure footed and its sustainability assured.

He noted that longer term inflation expectations remain broadly stable in spite of high volatility in food and fuel prices.

“Demand pull is still weak,” he said, adding he would continue to look through the recent elevation in inflation and remain focused on reviving the economy on a path of strong and sustainable growth. “An integral part of this approach would be to insulate domestic financial markets from global spillovers and volatility so that congenial financial conditions continue to support growth,” he opined.

Mridul K Saggar said it was equally important to understand that while increasing fiscal space to the extent possible is desirable, any revision in fiscal targets should be consistent with medium-term debt sustainability and should not impinge on conduct of monetary policy, such as requiring direct monetisation that has been eschewed even by countries with low inflation.

Inflation a concern

On the other hand, inflation rates have been consistently well above the mid point of the target zone and is forecast to remain elevated for some time. “This is a difficult situation, but I believe that the balance of risk and reward is in favour of monetary accommodation,” Jayanth R Varma said.

As per the minutes, Ashima Goyal said India’s cautious approach to capital account convertibility means that volatile fixed income flows are still capped at 6 per cent of outstanding stocks of G-Secs.

The next meeting of the MPC is scheduled during June 2 to 4, 2021.