Growth pangs gain precedence for India’s inflation-targeting RBI

By Anirban Nag

The economic disruption caused by the Covid-19 pandemic has brought growth concerns to the top of Indian monetary policymakers’ priority list, and relegated the inflation goal to a secondary position, minutes of their meeting show.

The pivot for growth boosts the odds that interest rates will stay lower for longer to ensure the economy’s recovery takes hold. The six-member Monetary Policy Committee earlier this month left the benchmark repurchase rate unchanged for a sixth straight meeting, even as the Reserve Bank of India expanded its version of the quantitative easing program to spur economic activity.

Minutes from the MPC’s June 2-4 meeting released on Friday showed that policy makers agreed that the pandemic’s second wave has necessitated urgent policy interventions.

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“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,” Governor Shaktikanta Das was cited as saying in the minutes. “The dent on economic activity due to the second wave of the virus has necessitated the continuation of monetary measures to support the process of economic recovery to make it durable.”

The RBI sees Asia’s third-largest economy expanding 9.5 per cent in the year that began April 1, slower than the 10.5 per cent pace it had forecast before a second deadly outbreak of coronavirus infections. The central bank expects inflation to end up at 5.1 per cent this year, toward the upper end of its 2-6 per cent target band.

The MPC is convinced that the current gains in price growth — fanned by supply-side problems, a rise in fuel taxes and higher commodity prices — don’t warrant a withdrawal of the easy measures put in place since last year.

Here are some excerpts from the minutes:

• Michael Debabrata Patra​​​​​​, the deputy governor overseeing monetary policy, said he sees the recent price surge as supply-side driven and lacking any persistent demand pull. “The growth-inflation trade-off and consequently, policy choices have shifted towards increasing accommodation,” he said
• Mridul Saggar, an executive director at RBI, warned against pulling out policy support prematurely, while saying there’s need to “support growth for now as the flexible inflation targeting framework allows temporary deviation from the target so long as inflation is expected to be within tolerance bands”
• Ashima Goyal​​​​​​, a dovish member on the panel, said given that output gap has widened and inflation is largely predicted to remain within the tolerance band, macroeconomic policy clearly has to further stimulate demand
• Jayanth R. Varma, a professor at the Indian Institute of Management at Ahmedabad, said the balance of risk and reward continues to be in favor of monetary accommodation