HYDERABAD: The RBI’s Monetary Policy Committee (MPC) is divided, yet united. During its meeting early this month, the country’s six chief inflation-nutters unanimously agreed to keep repo rate unchanged at 5.15 per cent, but differed if growth revival from here on needs a monetary or fiscal push.
While the MPC broadly believes it has policy headroom, three members expect structural reforms to aid recovery before they can take the pedal off policy rates. In essence, as Michael Patra observed, the panel ‘entered a tunnel of testing trade-offs’ (inflation vs growth) and ‘the light at the end of it won’t be seen for some time to come’.
RBI Governor Shaktikanta Das maintained that macro-economy needs further monetary stimulus, though wants to time it optimally.
But external member and known hawk Chetan Ghate sees no space for rate cuts. According to Ghate, Budget 2020 offered a combined tax stimulus (including corporate and income tax cuts) of 1.2 per cent of GDP. “If growth hasn’t revived with a 135 bps cuts in the policy rate and a tax stimulus amounting to 1.2 per cent of GDP, then the need of the hour is more structural reform,” he said.
Echoing Ghate, Janak Raj believes, the need is to step up investment and improve productivity through further structural reforms.
Ravindra H Dholakia too concluded that long-term growth revival depends critically on fiscal policy and structural reforms.
He merely shot down Budget 2020 saying it won’t aid immediate growth recovery as the measures were pro-cyclical against the needed counter-cyclical boost.According to him, the FY20 fiscal slippage of 41 bps includes 36 bps due to cyclical factors while only 5 bps was genuine fiscal slippage.
“In a year of a serious growth slowdown, such an adherence to ‘fiscal discipline’ not only shows misplaced emphasis and unjustified concerns but also a contractionary fiscal policy,” he reasoned. Despite intense efforts, inflation trajectory remains uncertain, though the MPC hopes the recent price spike will subside in future.
Food inflation, including onion’s abnormal price behaviour besides others will be carefully monitored. The panel had an ancillary concern in Coronavirus, besides risks of global growth and fluctuating crude prices.