Home >News >India >MPC members differ over timing of growth recovery

The pace of economic recovery, inflation expectations and output gap dominated discussions at the Monetary Policy Committee’s (MPC) latest meeting, minutes released on Friday showed. This was the MPC’s first meeting after new members Jayanth R. Varma, Ashima Goyal and Shashanka Bhide joined the committee.

While Reserve Bank of India deputy governor Michael Patra and executive director Mridul K. Saggar expressed worries that recovery will be slow if the economy continues to contract, governor Shaktikanta Das and Bhide were optimistic about a strong revival before the end of the fiscal.

At its 7-9 October meeting, the MPC kept the key lending rate unchanged at 4% and voted to maintain its accommodative policy stance during the current financial year, and into the next financial year.

Patra called for pragmatic caution, despite sequential improvement in some high-frequency indicators. He said it may take years for the economy to regain lost output.

“If the NSO’s provisional estimates for Q2 that are expected at the end of November corroborate at least the direction of these forecasts, India has entered a technical recession in the first half of the year for the first time in its history," Patra said.

“Nonetheless, if the projections hold, the level of GDP would have fallen approximately 6% below its pre-covid level by the end of 2020-21, and it may take years to regain this lost output. There is also an anecdotal sense that the economy’s potential output has fallen, and the post-covid growth trajectory will look very different from what has been recorded so far," he said.

Saggar said the output gap—a measure of the difference between an economy’s actual and potential output—will close only towards the end of the fiscal year. “The GDP is likely to contract close to the double-digit mark in Q2 2020-21. A range of model-based exercises, as well as my judgment superimposed on these, suggest that output gap in terms of levels of GDP will close only towards the end of 2021-22," he said.

Das, on the other hand, was more optimistic about a strong rebound by next year. “Overall, we expect a likely reduction in the rate of contraction in GDP during Q2 2020-21 and a return to positive growth by Q4 2020-21. Despite the sequential improvement in Q3 and Q4, the full-year GDP is expected to contract by 9.5% with a strong rebound next year," said Das.

The MPC has cut repo rate by a cumulative 250 basis points since February 2019.

Economists said the next rate cut is likely only next fiscal year, as inflation remains stubborn. “Based on our reading of the minutes, we anticipate that the accommodative stance will persist for an extended period of time. While the MPC members clearly desire to support the economic recovery, inflation may not oblige by falling fast enough to allow for speedy or substantial rate cuts. In our view, the incoming price data suggests that the chances of a February 2021 rate cut have dimmed," said Aditi Nayar, principal economist, ICRA Ltd.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, said the MPC has for the first time discussed policy measures other than the interest rate. “The MPC minutes correctly emphasize that the current circumstances require communication to be the primary vehicle in the policy itself. Such explicit forward guidance is an apt signalling device to align the market and RBI expectations of a lower term structure of interest rates," said Ghosh.

Varma, the only one who voted against an accommodative stance, explained the need to spell out the forward guidance more clearly. His dissent pertains to the MPC’s forward guidance, which says “To continue with the accommodative stance as long as necessary to revive growth on a durable basis, while ensuring that inflation remains within the target going forward."

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