Cautious words from MPC

This newspaper has been arguing that the economy still needs fiscal support to convert the ongoing recovery into a sustainable one. The monetary policy’s future course and its efficacy will depend on the fiscal policy trajectory the budget will take

The Minutes of Reserve Bank of India’s Monetary Policy Committee (MPC) meeting, which ended on December 8, were released on December 22. Unlike the MPC resolution -- this carries the key decisions and the outlook on inflation and growth -- minutes of the MPC give a detailed insights into the thinking of MPC members. There are three key messages in the remarks made by MPC members in its December meeting.

The element of economic uncertainty from the Omicron variant has only increased since the MPC meeting. (HT Photo)

The first is a consensus view that the better-than-expected economic recovery – GDP growth in the September quarter exceeded most forecasts – continues to remain fragile, especially from the demand side. Almost all MPC members have highlighted the weakness in private consumption and underlined the need for continuing with policy support.

The second is uncertainty about inflation. On the one hand, there is a belief that reduction in taxes on petrol-diesel, easing of food inflation after arrival of fresh crops should and easing of inventory pressures in the global economy could ease price pressures. At the same time, members have also drawn attention towards inflationary tailwinds from domestic factors such as hike in mobile tariffs and possible hike in GST rates on some items.

Finally, and this is a minority view echoed by Prof Jayanth R Varma in MPC, there are valid questions about the efficacy of monetary policy in supporting the economic recovery. Even RBI deputy governor Michael Debabrata Patra, although he did not dissent on the continuation of accommodative monetary policy stance like Prof Varma, has described his decision of not dissenting as a “fait accompli”.

The element of economic uncertainty from the Omicron variant has only increased since the MPC meeting. Most analysts expect the MPC to push towards policy normalisation, first with a reverse repo hike and then a policy rate increase.

The next MPC meeting will happen after the government has presented its annual budget. This newspaper has been arguing that the economy still needs fiscal support to convert the ongoing recovery into a sustainable one. The monetary policy’s future course and its efficacy will depend on the fiscal policy trajectory the budget will take.