MPC minutes: Growth momentum needs to strengthen further, says RBI Guv

During the monetary policy meeting, the RBI decided to leave benchmark interest rate unchanged at 4 per cent
The country's economic growth momentum needs to strengthen further, said RBI governor Shaktikanta Das during the latest monetary policy meeting, according to the minutes released by the central bank.

"Growth, although uneven, is recovering and gathering momentum, and the outlook has improved significantly with the rollout of the vaccine programme in the country. The growth momentum, however, needs to strengthen further for a sustained revival of the economy and for a quick return of the level of output to the pre-Covid trajectory," said Das.

During the monetary policy meeting, held between February 3-5, the RBI decided to leave benchmark interest rate unchanged at 4 per cent but maintained an accommodative stance, implying rate cuts in the future if need arises to support the economy hit by the Covid-19 pandemic.  

All the six members of the MPC had voted for keeping the policy repo rate unchanged.

"The sharp correction in food inflation has improved the near-term headline inflation outlook, although core inflation pressures persist," said Das according to the MPC minutes released on Monday."

Consistent with the accommodative stance of the monetary policy, the Reserve Bank remains committed to ensure the availability of ample liquidity in the system to foster congenial financial conditions for the recovery to gain traction, said Das. 

The RBI has been set a medium term target to keep retail inflation at 4 per cent with a bias of +/- 2 per cent on the either side.

The next meeting of the monetary policy committee is scheduled between April 5-7.

"Upside risks to the outlook for inflation persist. First, core inflation remains stubborn and will warrant close monitoring as it has the potential to render the recent fortuitous improvements in the macroeconomic outlook stillborn," said Michael Patra, an MPC member.

"Rising international commodity prices are being watched the world over with concern as heralding the return of inflation. For India, the relentless hardening of international crude prices is worrisome," he said.

On the near term challenges for growth, Micheal Patra said, concerns about financial stability have risen, adding that the recent new highs scaled by equity markets could be driven by irrational exuberance. 

"It is difficult to tell in an environment of exceptionally low interest rates all around, large corporate profits but still no capex to write home about, and high levels of market borrowings," he said.

"Food prices are at near bottom and though they may start firming up from the first quarter of FY22 with some price build up aided partly from firming food and non-food international commodity prices, high food inflation like last year is unlikely to be repeated," said Mridul Saggar, another MPC member.

"However, cost-push increases may come from higher crude oil prices that will feed into costs, especially fertiliser prices and as they get factored in MSPs," he said.

Mridul Saggr said the growth is still fragile and that support need to be extended into the first quarter of next financial year and longer if necessary, though with risk of a re-calibration in some scenarios such as one in which core inflation momentum picks up further.

Ashima Goyal, another member of the MPC noted that although growth has turned positive, output remains below 2019 levels. 

"Excess capacity continues, supply chains have room to normalize much further, and unemployment rates have increased despite a recovery in employment, because of the rise in labour participation rates as willingness to work rose with the waning of Covid-19 fears," she said.

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