MPC: Need both monetary and fiscal steps for recovery

Both monetary and fiscal support, the MPC believes, are needed to ensure demand doesn’t fall victim to the pandemic, showed the minutes of the committee’s meeting held earlier this month.

Consumer inflation exceeded the upper band of the central bank tolerance threshold in May. Yet, the MPC voted to retain the prevailing repo rate at 4% and continue with a supportive stance — for as long as necessary — to nurse a fragile economic recovery.

Fiscal measures, besides monetary support, could help achieve the twin objectives of inflation reduction and demand sustenance.

“Active and timely supply-side policy measures with regard to petrol and diesel, edible oil and pulses, among others, would be critical to bring about a durable softening of price pressures,” Reserve Bank of India (RBI) Governor Shaktikanta Das said at the MPC meeting.

To be sure, bond yields have risen after the RBI’s status quo on policy rates despite mounting inflation concerns.

“Retail inflation is not yet predominantly demand driven, and to accept output sacrifice at this stage may not be the best policy choice,” RBI executive director Mridul Sagar said at the MPC meeting.

India’s economy is expected to expand at a slower pace than pencilled in earlier, with the MPC scaling down growth projections for FY22 to 9.5% from 10.5%. To cool prices and keep demand resilient, the focus should be on removing supply bottlenecks.

Members of the committee believe the price surge is due to supply-side constraints triggered by curbs on mobility and business operations in the wake of the second Covid wave.

Such pressures should ease once economic activity normalises, the MPC minutes said. “The dominant current view is that global price pressures are temporary and expected to reduce as supply chain disruptions and congestion are overcome,” said external member Ashima Goyal, a professor at IGIDR.

The recent initiative of a group of ministers to monitor supplies is seen as a welcome step by the MPC.

“(This) should be matched by proactive actions necessary to deflect imported input costs from adding to inflationary pressures,” said RBI deputy governor Michael Patra.

As more states lift lockdowns, prices are expected to soften.

“Easing of pricing pressures will require more efficient operation of trade and logistics infrastructure, supported by easing of movement,” said external member Shashank Bhide, a senior advisor at NCAER.