BackRBI’s new MPC bats for investment revival, sharpens focus on growth
The minutes of the MPC’s October meeting reveals that the government bond yield curve and what its implications are for investments found fair place in discussions, besides inflation and growth dynamics
PremiumThe newly minted monetary policy committee (MPC) has widened the scope of its discussion, if not voting, beyond the narrow linkages of inflation and policy rates. The minutes of the MPC’s October meeting reveals that the government bond yield curve and what its implications are for investments found fair place in discussions, besides inflation and growth dynamics.
The circumstances amid a pandemic seem to have necessitated a broader canvas of metrics for the MPC to deliberate on. While the impact of the pandemic on growth weighed the most on the committee, the real worry seemed to be long-term investments. Most of the members highlighted the need to encourage long term investments even as short-term demand should get all the support through measures by both the RBI and the government.
The strongest voice here was of JR Varma, also the lone dissenter against the policy stance. Varma said that India’s sovereign bond yield curve is one of the steepest in the world and it hurts investments. “Excessive long-term rates exacerbate the collapse of investments in the economy," Varma said. Michael Patra, deputy governor and incharge of monetary policy at the RBI suggested that investments are critical for a sustained growth path. “Empirical evidence suggests that consumption-led recoveries are shallow and short-lived," Patra said. Governor Shaktikanta Das too seem to side with most members on investment. Das suggested that one of reasons behind the MPC’s guidance to keep rates low for long was revival of investment. “This enhanced guidance should strengthen and quicken the pace of transmission to longer-term yields and help support consumption and investment demand in the economy," said Das.
The MPC had said that its stance would remain accommodative well into the next financial year, indicating that policy rates may remain low for longer. Varma, however, called for a guidance beyond six months if the RBI wants to revive investment. “Forward guidance of six months in the MPC resolution is in my view suboptimal. I would also point out that the weakness of investments in the Indian economy predates the Covid-19 pandemic, and this merits a longer term response that goes beyond six months," he said.
Considering that most members want to revive investments, it is likely that policy rates would remain low for a long time. In the absence of a rude surprise on inflation, the RBI is unlikely to temper down its growth-centric narrative. What this means for markets is that the central bank is willing to keep even long-term interest rates lower so that India’s private sector can get comfortable enough to invest. The minutes show clearly that the MPC is not looking at FY21 anymore but beyond. It is looking towards the potential recovery and the RBI is already preparing for it.
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