Navigating the narrow passage between recovery and inflation
The new MPC has done well but it would take game-changing reforms for our economy to regain its pre-covid trend growth
The new monetary policy committee (MPC), which submitted its first report last Friday, has started well. Faced with an unprecedented crisis, a steep gross domestic product (GDP) contraction of 24% in the first quarter of 2020-21, along with inflation rising above the Reserve Bank of India’s (RBI) tolerance band to nearly 7% , the MPC chose to navigate a cautious path between stimulating economic recovery and containing inflation. It has maintained all its policy rates, including its repo rate (held at 4%), to contain inflation. Meanwhile, RBI has taken several measures to ease liquidity, lower the yield on the benchmark 10-year government security (G-Sec), and lower the private sector’s cost of borrowing, to stimulate economic activity. The MPC and RBI have correctly judged that elevated inflation is a transient phenomenon, driven largely by supply-side disruptions during the lockdown. Given the exceptional circumstances, they have focused on the steep economic contraction rather than their principal mandate of containing inflation. (I should disclose here that MPC member Shashank Bhide is my colleague at the National Council of Applied Economic Research, or NCAER).