A debate about the efficacy of the central bank’s guidance appears to be intensifying within the MPC with Governor Shaktikanta Das hesitant to commit himself on a time-bound guidance, while Prof. Jayant Varma declaring it to be ineffective and calling for action by the central bank.
Independent members as well as RBI insiders believe that the recovery appears fragile and that priority should be to secure economic recovery as inflation appears to be a distant problem, for now. To keep yields under check, the RBI announced its G-sec Acquisition Programme or G-SAP, through which it would buy Rs 1 lakh crore worth of government bonds in the fiscal first quarter.
“The principal motivation for the forward guidance was to reduce long-term yields in the backdrop of an excessively steep yield curve,” Jayant Varma, an independent member wrote in the minutes. “Unfortunately, forward guidance has failed to flatten the yield curve, and I see little merit in persisting with it any more. A flattening of the yield curve remains an important goal but, I think it must be pursued using other instruments which largely lie outside the remit of the MPC.”
The MPC in its last meeting on April 7 unanimously voted to keep interest rate and the accommodative monetary stance unchanged to ensure that the economic revival is sustained. While it retained the growth forecast at 10.5 per cent for the fiscal year, the inflation forecast was bumped up slightly but within the 2 per cent to 6 per cent band permitted by law.
“The dramatic increase in Covid-19 caseloads and intensification of localised lockdowns over the past few weeks could further shift the balance in favour of growth within the MPC in the lead up to the next policy meeting,’’ said Rahul Bajoria, economist at Barclays.
Deputy governor Michael Patra, who normally puts inflation and fears of price rise above all, pushed such worries to the backburner to vote for persisting with a policy to revive growth.
“Monetary policy has to remain supportive of the economy until the recovery is more sure-footed and its sustainability assured,’’ said Patra. “I 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.’’
Even rising inflation seems to be of little concern amid surging infections which touched a single-day record of 3.15 lakh on Wednesday.
The conduct of monetary policy could be smooth and is firmly in control even if external factors such as rising dollar and a flight of capital happen.
“Large foreign exchange reserves, acquired during surges in inflows, are sufficient to counter outflows due to rising US G-Sec rates, without having to raise domestic rates,’’ said Prof. Ashima Gyoal. “RBI has the space to smooth volatility.’’
But Governor Das, who has been leading the growth revival theme at central bank, was more cautions on how the monetary policy could evolve. “Given the uncertainties and the fact that we are in the beginning of a new financial year, it is too early to give explicit time-based forward guidance,” wrote Governor Das. “The forward guidance in terms of securing a sustainable growth on a durable basis itself testifies to our commitment to continue to mitigate the impact of Covid-19 on the economy.”
