Amid prolonged uncertainty, continued policy support will be crucial for sustained economic recovery from the coronavirus pandemic, Reserve Bank Governor Shaktikanta Das said at the recent meeting of the Monetary Policy Committee.
"In this period of prolonged uncertainty, it would be wise to remain agile and respond in a gradual, calibrated and well telegraphed manner to the emerging challenges," opined Das, according to the minutes of the MPC meeting released by the Reserve Bank on Thursday.
Observing that economic recovery from the pandemic remains incomplete and uneven, he said, "continued support from various policies remains crucial for a sustained recovery."
The governor said the renewed surge in international crude oil prices, however, requires close monitoring.
"We need to remain watchful of the risks to domestic inflation arising from rise in international commodity prices due to exogenous factors including geo-political developments. While core inflation remains elevated, demand-pull pressures are still muted, given the slack in the economy," he said at the MPC meet.
After the three-day meeting of the Monetary Policy Committee (MPC) early this month, RBI decided to keep its key lending rates steady at record low levels for the 10th straight time to support a durable recovery of the economy from the pandemic.
The six-member MPC, which has been on pause since August 2020, voted unanimously to maintain the status quo on the repo rate and by a majority of 5-1 decided to retain the accommodative policy stance as long as necessary.
MPC member and RBI Deputy Governor Michael Debabrata Patra said the Indian economy is encountering headwinds as well as cross currents.
Referring to headwinds, he said more than a billion vaccinations have been achieved but only 56 per cent of the total population is fully vaccinated. The next billion "will be back breaking" he said.
He said economic activity in India appears to have resiliently withstood the third wave, but messages from incoming high frequency indicators are mixed.
"It is prudent to assume that the recovery may have lost some momentum during Q4: 2021-22 and Q1: 2022-23. Inflation appears to be approaching an inflection point after which it is projected on a downward path through all of 2022-23," Patra said while voting for maintaining the policy rate and keeping the accommodative stance of policy unchanged.
RBI Executive Director and MPC member Mridul K Saggar said the Omicron variant along with continued port congestions and supply shortages has started to drag down global growth.
This, in turn, may act in accordance with Bernoulli's principle on fluid pressure, making the growth pipe narrower with falling external demand acting to dampen price pressures that have turned elevated from the supply-side, he said.
On inflation, Saggar said the headline inflation is projected to ease to the vicinity of 5 per cent mark in the first half of 2022-23 and then recede further to the target of 4 per cent by third quarter of the next fiscal.
However, monsoon outturn and oil price dynamics will need to be closely watched, he added.
MPC member Jayanth R Varma voted in favour of maintaining the policy rate at 4 per cent but voted against the policy stance on two counts.
"First, a switch to neutral stance is now long overdue. Second, the continued harping on combating the ill effect of the pandemic has become counter productive and deflects the focus of the MPC away from the core issue of addressing the recessionary trends that go back at least to 2019," Varma said.
MPC member Ashima Goyal was of the view that the current account deficit remains manageable and the overall balance of payments is surplus with a rising share of foreign direct investment.
This time there is space to align policy to the needs of the domestic cycle, Goyal said.
"In view of expected trends in inflation and growth and in order to moderate market over-reaction, I vote to continue with the current stance and repo rate," Goyal added.
MPC member Shashanka Bhide said that to strengthen the positive growth trends in the economy, the need for favourable monetary and financial conditions has remained a critical condition. Pickup in momentum of consumption and investment expenditure would require access to financial resources to both consumers and firms.
He also voted in favour of continuing with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of the pandemic on the economy, while ensuring that inflation remains within the target going forward.