The concerns on the new Omicron variant was among the major factors that were discussed in the last meeting of the Monetary Policy Committee (MPC), showed the minutes of the meeting released on December 22.
The MPC had kept the repo rate, the rate at which the central bank lends short-term funds to banks, at 4 percent and retained the policy stance as accommodative.
One of the members, Jayanath Varma, said monetary policy is no longer the right instrument to deal with the Covid-19 pandemic whose economic effects have diminished greatly and become more concentrated in narrow pockets of the economy.
"There is no evidence so far to suggest that the Omicron variant of the Covid-19 virus would change the picture materially," Varma said.
Another member Micheal Patra touched upon the uncertainty surrounding the Omicron variant. "Three fundamental questions about Omicron have put national authorities on high alert – is it more transmissible than other variants? Can it evade immunity conferred by previous infections or vaccination? Does it cause more severe disease?," Patra asked.
As countries race to contain Omicron with travel restraints and new quarantine and social distancing measures, the global recovery and the inflation outlook are at risk again, Patra said.
Other members echoed this view.
Omicron cases are on the rise in India which has reported 213 cases so far. Omicron variant of coronavirus is thrice as contagious as the Delta variant, the Centre informed the state governments on December 21, as it instructed them to take proactive measures to contain its spread.
The Centre has asked the state and district authorities to consider imposing containment measures in areas where a surge in positivity rate is reported.
“India is being lashed by global spillovers. The main conduit has been financial markets so far but the channels themselves are diversifying. The biggest risk of contagion is now from the new variant. Unless a clearer picture emerges on the near-term outlook, we must take guard and resume battle readiness again,” Patra said.
Varma however continued with his dissent on the policy stance and the efficacy of the monetary policy in tackling Covid. “There is no evidence so far to suggest that the Omicron variant of the Covid-19 virus would change the picture materially,” Varma said.
Noting that economic activity appears to have surpassed its pre-pandemic level and inflation is becoming persistent in the upper region of the tolerance band, Varma said it is no longer appropriate to stick to the monetary policy stance first adopted in May 2020 when the adverse economic effects of the pandemic were at their peak.
“I am therefore not in favour of the decision to keep the reverse repo rate at 3.35%, and vote against the accommodative stance,” Varma said.
Varma further argued that raising effective money market rates quickly towards 4 percent would demonstrate the MPC’s commitment to the inflation target, help anchor expectations, reduce risk premia, enhance macroeconomic stability, and allow lower long-term interest rates to be sustained for longer thereby aiding the economic recovery.
There is growing uncertainty regarding the evolving global macroeconomic outlook, RBI Governor Shaktikanta Das said.
"The emergence of the Omicron variant may cast some shadow on the momentum of contact-intensive services that were just showing signs of recovery in recent months. The threat of Omicron is also imparting additional volatility to the financial markets," Das said.
Given these uncertainties, continued policy support is warranted for a durable, broad-based and self-sustaining rebound, to nurture revival in sectors which are lagging and to safeguard those which are exposed to the evolving headwinds, Das added.
"There is also a necessity to have a firm understanding of the impact of the Omicron variant. The calibration and timing of a monetary policy response and preventing build-up of financial stability risks are very important in such an uncertain environment," Das said.