Reserve Bank of India (RBI) Governor Shaktikanta Das
The Monetary Policy committee (MPC) minutes released on February 22 shows that the panel largely continues to be on the same page with respect to the urgent need to support a faltering economy hit hard by the COVID-19 pandemic.
The MPC comments indicate that the growth recovery may take longer time than initially expected in the absence of investments and systemic stress. Further, the comments of the members suggest that the panel could continue with the current accommodative stance for a longer period to support growth.
There is a larger worry on the resurgence of asset quality stress in the banking system. One of the MPC members, Micheal Patra has cautioned that banks could see higher NPAs (non-performing assets) as the benefit of regulatory dispensations disappears. The RBI had earlier projected the GNPAs of banks to rise to close to 15 per cent by September this year in a worst case scenario.
“Banks have stronger capital buffers than during the global financial crisis, but stress in the financial sector’s balance sheets could intensify as the camouflage of moratorium, asset classification standstill and restructuring fades,” Patra said.
Hence, capital infusion is a must to deal with potential stress in the system, Patra said.
“Capital infusion and innovative ways of dealing with potential loan delinquencies need to occupy the highest policy attention so that the embryonic recovery in credit growth can be nurtured into a more durable trajectory that also fuels the macroeconomic recovery,” Patra said.
The MPC announced a status quo in key rates on February 5 with all members unanimously voting in favour of the decision.
“Recovery in investment demand is a key factor in sustaining the economic recovery. As per the FAEs, the Gross Fixed Capital Formation (GFCF) declined by 14.5 per cent in FY 21, year on year basis. The GFCF had also decreased, year on year basis, in 2019-20 based on provisional estimates for 2019-20,” said another member, Shashanka Bhide.
The accommodative monetary policy stance is needed to strengthen ongoing economic recovery enabling expansion of both output and demand, Bhide said.
Ashima Goyal, another MPC member, said although growth has turned positive, output levels remain below 2019 levels. “Excess capacity continues, supply chains have room to normalize much further, and unemployment rates have increased despite a recovery in employment, because of the rise in labour participation rates as willingness to work rose with the waning of Covid-19 fears,” Goyal said.
While corporate India has done well, and consumer confidence is reviving, reliable data is still awaited on the resilience of the informal sector, Goyal said.
According to Jayanth R Varma, with both inflation and growth outcomes being well within the range of expectations of the MPC, and short term interest rates being within the corridor defined by the repo and reverse repo rate, there is nothing to be done and there is nothing to be said as of now.
“The MPC must of course continue to be data driven and must continue to monitor future developments carefully,” Varma said.
Mridul K Saggar, another MPC member, said as growth is still fragile, support to it need to be extended into Q1:2021-22 and longer if necessary, though with risk of a re-calibration in some scenarios such as one in which core inflation momentum picks up further.
A similar view was echoed by RBI Governor Shaktikanta Das, who said growth, although uneven, is recovering and gathering momentum, and the outlook has improved significantly with the roll out of the vaccine programme in the country. “The growth momentum, however, needs to strengthen further for a sustained revival of the economy and for a quick return of the level of output to the pre-COVID trajectory,” Das said.
The next meeting of the MPC is scheduled from April 5 to 7.