Jayanth Varma, one of the members of the monetary policy committee (MPC), strongly pitched against the continuation of the so-called 'accommodative' stance in the last policy meeting and said rate-setting panel's continued focus on pandemic-fight has become counter productive, showed the minutes of the MPC meeting on February 24.
Varma, the only member who voted against the continuation of accommodative stance said a switch to neutral stance is now long overdue. "Second, the continued harping on combating the ill effect of the pandemic has become counter productive and deflects the focus of the MPC away from the core issue of addressing the recessionary trends that go back at least to 2019," Varma said.
The MPC decided to keep all rates unchanged and continued with the accommodative stance in the last policy meeting.
Varma has long argued against the accommodative stance saying monetary policy has limited scope to fight the pandemic, instead it should focus on core policy issues.
At the MPC meeting which was held on February 8-10, the MPC decided to continue with the accommodative stance “as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.”
The meeting was attended by all MPC members –Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Mridul K. Saggar, Michael Debabrata Patra and was chaired by RBI Governor Shaktikanta Das. Noting that monetary policy acts with lags, Varma said it is important to set policy looking at the expected state of the economy 3-4 quarters from now and not in terms of where it is today.
"Robust growth coupled with sticky inflation could necessitate larger rises in nominal rates, while weak growth accompanied by benign inflation could open up the space for a more accommodative monetary policy. With risks appearing to be balanced on both sides, the policy stance needs to be neutral," said Varma.
RBI Governor Shaktikanta Das said economic recovery from the pandemic remains incomplete and uneven and continued support from various policies remains crucial for a sustained recovery. "The expected moderation in inflation trajectory over the next financial year provides room for monetary policy to remain accommodative," said Das.
In the domestic front, rapid spread of the Omicron variant in conjunction with the fading of festive and pent-up demand has tempered economic activity in the nearterm as reflected in several high-frequency indicators, Das said.
"Going forward, the current wave is showing signs of waning and with the return of normalcy, the pace of economic activity is likely to be bolstered by buoyant Rabi prospects, robust export demand, accommodative monetary and liquidity conditions, improving credit offtake, and the continued push in capital expenditure and infrastructure in the Union Budget 2022-23," Das added.
Michael Patra, another MPC member and the deputy governor in charge of monetary policy, said monetary policy cannot tackle a supply-driven inflation.
"When inflation is driven by demand, monetary policy can stabilise inflation and growth. Monetary policy cannot play its stabilization role when inflation is the result of supply constraints," Patra said.
Shashanka Bhide, another MPC member, too stressed the need for continuation of accommodative monetary policy to support growth. "To strengthen the positive growth trends in the economy, the need for favourable monetary and financial conditions has remained a critical condition," Bhide said.
Further, pickup in momentum of consumption and investment expenditure would require access to financial resources to both consumers and firms, Bhide added.
Most economists expect RBI to shift to neutral stance later this year and gradually hiking rates as growth recovery gains momentum.