Economic policy

MPC minutes show uncertainty will complicate economic policy

Uncertainty stemming from both global factors and the trajectory of the pandemic influenced the meeting of the RBI’s Monetary Policy Committee (MPC) this month. The MPC minutes highlight the increasing complexity of economic policy-making and the need to synchronize monetary and fiscal policies to insulate the economy from uncertainty and also provide policy support to an underperforming economy. Consequently, there is unanimity within the committee to say that the key interest rate must be maintained at the current level of 4%.

A sharp rise in inflation in many countries is causing uncertainty stemming from global factors. This is also expected to happen in India, with the RBI predicting average inflation of around 5.7% in the January-March quarter, higher than the 5.3% forecast for 2021-22. Supply disruptions as economies normalize and a rise in commodity prices, especially crude, pose the biggest challenge in India’s inflation scenario. The challenge for the RBI in this scenario is that while it has to deal with both domestic inflation and possible turmoil in financial markets as major central banks adjust their policies, it must also provide monetary support to the economic recovery. MPC minutes show that the committee is not yet convinced that the rally seen in the July-September quarter is sustainable.

The economic scenario calls for close coordination between monetary and fiscal authorities. India’s approach so far has been to let monetary policy based on excess liquidity and a low policy rate provide the main boost to the economy. However, uncertainty generally catalyzes banks’ risk aversion. Fiscal policy may therefore need to address shortcomings in some contact-intensive sectors that have yet to recover. As states have started tightening some restrictions to deal with Omicron, the Indian government may need to calibrate fiscal policy in the upcoming budget to complement monetary policy. It will also provide RBI space to limit any turbulence due to global uncertainty.



LinkedIn


This article appeared as an editorial opinion in the print edition of the Times of India.



END OF ARTICLE