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    MPC split over demand or supply in growth revival

    Synopsis

    Janak Raj, executive director at RBI believes that the revival could be in a different way.

    RBI-
    While the economy is set to shrink for the first time in decades, the recovery path may be a difficult one.
    Mumbai: Differences over the growth potential, demand and inflation led to a dissent vote in the quantum of interest rate cut in the last Monetary Policy Committee meet as economist Chetan Ghate factors in a quick revival of demand while deputy governor Michael Patra believes it may take `years to repair’ the damage caused by Covid-19.

    While there has been unanimity among all the six members of the MPC in the blow to the economy by the lockdown, there are differences in how these members see the economy coming out of the current crisis.

    ``When the economy turns to the upside, the recovery in demand will be swift,’’ Ghate said in the minutes of the MPC meet on May 22 released by the RBI. ``There has already been a severe dislocation in domestic and global supply chains. It will take some time to for these to get resolved, and it is therefore likely that demand will recover faster than supply.’’

    But Janak Raj, executive director at RBI believes that the revival could be in a different way.

    "I believe that supplies would recover much faster than demand,’’ said Raj. ``This is because capacity to produce goods and services by and large remains intact, though non-availability of labour may temporarily hamper production for a few months. On the other hand, however, there has been a substantial loss of demand. A large number of daily labourers/wage earners have been rendered jobless because of lockdown."

    The MPC on May 22 voted 5 to 1 to reduce policy repo rate by 40 basis points to 4 percent and keep the stance accommodative. With this the RBI has cut rates by 250 basis points since Feb.. 2019, and 115 basis points since the outbreak of Covid-19. A basis point is 0.01 percentage point.

    While the economy is set to shrink for the first time in decades, the recovery path may be a difficult one.

    "The damage is so deep and extensive that India’s potential output has been pushed down, and it will take years to repair," said Deputy Governor Patra.

    At the same time, there are concerns about the high real rates as well.

    "I believe that the real policy rate needs to be kept positive but not so high under the present circumstances" said Ravindra Dholakia

    While investors were disappointed with the fiscal stimulus package, conservative economist Ghate found it appropriate.

    ``An ambitious Keynesian fiscal stimulus was always going to have to navigate between Scylla and Charybdis,’’ said Ghate referring to the Greek mythology about choosing between two evils. ``If the government spent too much on the discretionary part of the stimulus, the yield curve would have gotten thrashed, banks would have booked losses, and our credit rating would have gotten a downgrade. It would have also signalled that the government is giving up on its commitment to controlling inflation.’’

    Ghate also hinted that RBI’s reduction of reverse repo rate outside of the MPC meet may not be a desirable one.

    ``For all practical purposes the reverse repo rate is now the effective policy rate,’’ said Ghate. I worry that the current quantum of liquidity will be difficult to unwind when things return back to normal. RBI’s liquidity policy has helped stabilize financial markets, but lender of last resort policies, as is widely recognised, are not useful outside a crisis, and thus should not be viewed as part of normal monetary policy.’’



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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