The first Monetary Policy Committee (MPC) of RBI met for the last time during 4 to 6 August 2020. To commemorate the end its four year term, the Committee thankfully did not take any populist decision. It prudently kept the policy rates unchanged, as I had wished for (see To cut or not to cut is not the question), and focused on mitigation of stress caused by the economic lockdown due to spread of COVID-19.
In line with the stand taken by the government, the MPC refrained from issuing growth and inflation estimates. However, the governor's statement makes the following things clear:
(a) Inflation, especially food & energy inflation, is a matter of serious concern at present and development on this front need to be watched carefully; though the governor expressed hope that as the monsoon progressed well and base effect comes into play, the food inflation will ease in 2HFY21 leading the headline inflation below the MPC target range. It is pertinent to note that for past almost one year the headline inflation is running above the MPC target range of 2 to 4%. Despite this violation, MPC has continued on the path of substantial monetary easing even before the COVID-19 breakout.
(b) GDP Growth for the current year shall remain in contraction mode, despite robust recovery in the rural sector. MPC noted that "Manufacturing firms expect domestic demand to recover gradually from Q2 and to sustain through Q1:2021-22. On the other hand, consumer confidence turned more pessimistic in July relative to the preceding round of the Reserve Bank’s survey. External demand is expected to remain anaemic under the weight of the global recession and contraction in global trade. Taking into consideration the above factors, real GDP growth in the first half of the year is estimated to remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also estimated to be negative. An early containment of the COVID-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks."
(c) There is scope for further cuts in rates. Most likely these cuts will be implemented in 2HFY21 as the outlook for inflation and growth becomes clear.
(d) The Statement on Developmental and Regulatory Policies, the Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee and the Statement of the Governor, totally avoided any mention of the word "Fiscal". This makes it very clear that monetary policy function has chosen to overlook the fiscal digressions at present at least.
(e) RBI is mindful of the stock markets digressing from the economic realities and surge in the prices of gold. However, RBI refrained from making any specific provision to control the excesses in stock and bullion markets. Rather, it has relaxed conditions for loans against gold when gold prices are ruling at highest levels. The central banker obviously does not want to rock any boat at this point in time.
(f) RBI is actively managing liquidity and short term rates through various tools, and it seems to be enjoying the game. Expect this to continue for next few months at least.
(g) The realization within RBI is growing that a large number of MSME and individual loans may be terminally sick. Setting of a Committee under chairmanship of K. V. Kamath, a vocal supporter of one-time restructuring of stressed loans indicates that there is virtual acceptance within RBI that these loans would need to be restructured. I guess, the only thing that remains to be decided is the modalities of restructuring and who takes how much hit. The complete omission of the term "Moratorium" from the statement explains the caginess of RBI on this issue.
To sum up, RBI has impregnated the markets with the twins - hope and caution. The morning sickness will keep bothering in coming days; and joy and bliss will keep it hopeful.
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