Moneycontrol Pro Panorama | How monetary policy will deal with the second wave

Source: Reuters

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The key takeaway from the minutes of the last meeting of the Monetary Policy Committee is this: the new surge of infections threatens to upend the economic recovery and monetary policy would do all it can to support growth.

Remember, that when the MPC meeting had concluded on April 7^th, India’s seven-day average of COVID infections was just over 100,000. Now it is close to 300,000. Many states and cities have imposed lockdowns, which threaten to extend well into the next month as the healthcare infrastructure nears a point of collapse.

The MPC members did not think inflation was such a huge risk and attributed it to supply side pressures. Despite wholesale prices spiking to a multi-year high, growth concerns overrode inflation in the minds of the MPC members.

Governor Shaktikanta Das summed it thus: “Monetary policy should remain accommodative to support, nurture and consolidate the recovery. We need to continue to sustain the impulses of growth in the new financial year 2021-22.”

What form could this monetary policy support take?

According to Nomura Research, the minutes suggest a two-pronged strategy.

One, the MPC will continue with its accommodative stance and forward guidance for the foreseeable future till the recovery is secured.

Two, the central bank will continue focus on trying to manage the government yield curve; several members of the rate setting panel have called for more active usage of the bond buying programme (GSAP) to prevent a premature tightening of financial conditions.

With the consensus veering towards estimating the second wave to peak only by mid-May to June, expect monetary policy to remain accommodative till at least the August review.

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avi Krishnan

Moneycontrol Pro