Markets

RBI’s MPC feared broader inflation

(This story originally appeared in on Aug 21, 2020)

MUMBAI: Fear of inflation dominated the monetary policy committee (MPC) meeting of the RBI on August 6. Members said supply disruption was pushing up prices even as consumption patterns changed in favour of food, which was increasing the risk of inflation becoming broad-based.

In the meeting, the members had unanimously voted for a pause in monetary policy action and left the repo rate unchanged at 4%. According to the RBI, the inflation objective is obscured by the spike in food prices because of floods in eastern India and ongoing lockdown-related disruptions. Additionally, there are cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges, rising raw material costs reflected in upward revisions in steel prices and rise in gold prices due to demand for a safe haven.

“Given the uncertainty surrounding the inflation outlook and taking into consideration the extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, it is prudent to pause and remain watchful of incoming data as to how the outlook unravels,” the RBI said in a statement released with the MPC minutes on Thursday.

RBI governor Shaktikanta Das called for the government to address sector-specific supply side measures to tackle inflation as there was no demand side pressure on prices. “The survey-based measures of slack in the economy testify that there is little risk to inflation from demand side,” said Das.

das

Deputy governor Michael Patra hinted at a rate hike if inflation persists. “In fact, if inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by mandate to undertake remedial action, including an immediate and more than proportionate response to head off the build-up of inflation pressures and prevent it from getting generalised. The question is: Can economy withstand it in this virus-ravaged, debilitated state?” said Patra.

“Inflation surprises of recent months are undermining the MPC’s actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of Covid-19 on the economy,” said Patra. He warned that a situation like 2009-10 could emerge if inflationary pressures continue to build up. “Monetary policy action was delayed on the ground of nurturing nascent growth impulses, inflation became generalised and 13 consecutive policy rate increases could not excoriate inflation’s pernicious hold,” said Patra, referring to the post-Global Financial Crisis stimulus.

External member Chetan Ghate called upon the government to initiate reforms. “This should be a crisis that is not wasted. The government must continue to focus on much needed structural reforms. Some fiscal space should be reserved for later outbreaks,” he said.

Let’s block ads! (Why?)

Markets-Economic Times

Leave a Reply

Your email address will not be published. Required fields are marked *