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MUMBAI : The monetary policy committee of the Reserve Bank of India (RBI) feels that while growth impulses are visible, there is no certainly as to how well-entrenched these are and therefore decided to hold key policy rates, showed minutes of its latest meeting.

The six-member committee met between 6-8 December and retained the repo rate at 4%, last revised in May 2020. Since March last year, it has lowered the repo rate by 115 basis points (bps). All members -- Shashanka Bhide, Ashima Goyal, Mridul K. Saggar, Michael Debabrata Patra and Shaktikanta Das, except Jayanth R. Varma, voted to continue with the accommodative stance as long as necessary.

 “Overall, out of the 59 high frequency indicators that have become available for October out of 67 that I track, 88% of the indicators exhibited month-on-month improvement after a somewhat weak August and September," said Mridul K Saggar, executive director, RBI and an MPC member.

Saggar pointed out that while the momentum towards normalization has picked up significantly, a third of indicators are yet to cross their pre-pandemic levels. To be sure, the stress in informal sector is not adequately captured by these indicators, he said.

 “Small moves towards policy normalization may be sufficient now and one can decide to shift to a tightening monetary policy cycle at a point when it is clear that demand revival has acquired resilience and pandemic risks to growth have diminished or alternatively if inflation diffusion persists in near months which then can result in inflation getting generalized and persist next year," he said.

According to deputy governor Michael Patra, the Indian economy has been treading a trajectory that diverges from the global situation. To support his argument, Patra pointed out that bank credit is picking up, tax revenues are buoyant, exports are growing robustly and the current account balance is set to swing into a deficit on the back of strong import demand. However, there are limits to decoupling and there are vulnerabilities too.

 “The level of gross domestic product (GDP) in Q2 2021- 22 is barely at the so-called pre-pandemic level of Q2 2019-20, which itself grew at the slowest pace in six years preceding it. Consumption spending is held back by households hesitant to incur discretionary expenditure. Private investment remains timid and is yet to participate in the recovery," said Patra.

On inflation, Patra said that food inflation may ease with the usual winter softening, but core inflation will keep the rate-setting committee awake. This, he said, would emanate especially from the recent upward revisions of telecom tariffs and goods and services tax (GST) rates on clothing and footwear, the safe haven upswing in gold prices and the increasing likelihood of selling price revisions of consumer durables, automobiles by January 2022.

Patra said that India’s inflation developments reflect a scissor effect – rebound in demand colliding with supply bottlenecks; but shipping delays, delivery lags and semi-conductor shortages cannot last indefinitely and should certainly improve in the second half of 2022, as predicted by the IMF. “The biggest risk of contagion is now from the new variant. Unless a clearer picture emerges on the near-term outlook, we must take guard and resume battle readiness again," he said.

RBI governor Shaktikanta Das believes, there is growing uncertainty on the evolving global macroeconomic outlook and even as the prospects for economic activity are improving, there is still a slack with key drivers like private consumption remaining well below their pre-pandemic levels.

 “Given these uncertainties, continued policy support is warranted for a durable, broad-based and self-sustaining rebound, especially to nurture revival in sectors which are lagging and to safeguard those which are exposed to the evolving headwinds," Das said, adding that in such a scenario, it would be prudent to watch out for growth signals becoming well-entrenched while remaining vigilant on inflation dynamics.

Das also said it is necessary to have a firm understanding of the impact of the Omicron variant.

MPC member Jayanth Varma said that his views have not changed much since the August and October statements. Varma said he believes that that monetary policy is no longer the right instrument to deal with the covid-19 pandemic whose economic effects, as opposed to its health effects, have diminished greatly and become more concentrated in narrow pockets of the economy.

He said it is no longer appropriate to stick to the accommodative monetary policy stance first adopted in May 2020 when the adverse economic effects of the pandemic were at their peak. However, he voted in favour of maintaining the repo rate at 4%.

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