Banking Central | Omicron emerges as new cause for concern for MPC

The bi-monthly review of the Monetary Policy Committee (MPC), the outcome of which will be announced on December 8, will likely be a quiet affair.

The general consensus among economists is that the MPC will wait and watch for more cues on the inflation-front before taking any decision on rate action. The policy normalisation process, however, will continue in some form.

The MPC’s accommodative stance will continue as the growth-supportive policy is the stated approach of the rate-setting panel in the last two years. So, what is the new thing about this policy?

Between the last review and this one, the only new element that has emerged is the threat of the ‘Omicron’ variant of Corona virus. The MPC’s comments on how it views the new Omicron threat on the path to recovery will be watched closely.

If the MPC perceives the Omicron threat as a major concern, then the panel may up the level of caution on the likely rate reversal path. It is sensitive to fresh risks to growth. In the last policy review, Jayant Varma, one of the MPC members had highlighted the problem of a monetary policy in ‘slow motion’ arguing that the role of the monetary policy in containing the risks on growth and inflation is limited.

“Both these risks – one to inflation and the other to growth – are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility. A pattern of policy making is a slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” said Varma in the MPC minutes released on October 22.

The MPC had kept the repo rate, the rate at which the Reserve Bank of India (RBI) lends short-term funds to banks, at the same level in the last policy meeting.

The Inflation Front

Inflation has shown some easing trend of late but still remains away from the ideal rate at which the MPC wants to see it – at 4 per cent. India’s retail inflation rate, which is measured by the Consumer Price Index (CPI), rose to 4.48 percent in October. The CPI-based inflation in September 2021 was at 4.35 percent and 7.61 percent in October 2020.

The comfort, however, stayed for the fourth month in a row with the CPI below the Reserve Bank’s 6 percent margin. The MPC, as mentioned earlier, will continue to wait and watch until a clear downtrend in inflation emerges.

At the same time, the growth recovery remains tepid and whatever sharp jump seen this year is on account of the low base last year. India’s GDP, in the second quarter of the fiscal year 2021-22, grew at 8.4 percent, compared with a decline of 7.4 per cent last year.

The real challenge for the MPC is that, as Varma noted, the role of the monetary policy is limited to lifting the growth in a pandemic-induced slowdown. The reason for prolonged pause in policy rates has been an uncertain economic environment. Omicron has added to that uncertainty.

[Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.]