Reserve Bank of India Governor Shaktikanta Das said post-Covid improvement in economic recovery is not steady and continuous yet. The statement was part of the minutes of the RBI Monetary Policy Committee Meeting held from 2-4 December, 2020 that were released on Friday.
"The Reserve Bank’s consumer confidence survey of urban areas has registered a marginal uptick in November 2020 from its trough in September. Optimism on early vaccine availability has also boosted economic sentiments. As per my assessment, the recovery is multi-speed as more sectors are showing an upturn, though the improvement is not steady and continuous yet," said Das.
Investment demand in the economy is still to gain traction even as the transmission of policy rate actions has been sharper and quicker. Corporate bond yields have seen a significant reduction, he said.
While investment in fixed assets is muted, increased cash holdings, reduced leverage and improved profitability suggest that investment activity could rebound quickly as conditions normalise with the flattening of the COVID curve and the availability of vaccines, Das added.
"Overall, the persistence of inflation at elevated levels constrains monetary policy at the current juncture. At the same time, though recovery is underway, there is still continuous need to nurture and support growth to make it broad based and durable. A premature roll back of the monetary and liquidity policies of RBI would be detrimental to the nascent recovery and growth. The overall situation needs to be monitored carefully, both in the sides of growth and inflation," Das further said.
The Reserve Bank will continue to respond to global spill over to secure domestic stability with our liquidity management operations. The various instruments at our command will be used at the appropriate time, calibrating them to ensure that ample liquidity is available in the system, he said.
Going forward, stronger measures to address the supply side issues and the winter moderation in vegetable prices should result in some softening in inflation from its current levels. Continuing demand supply mismatches in protein-based food and edible oils would require active supply side measures. The Reserve Bank is constantly engaged with the concerned authorities for undertaking supply-side measures to contain inflation. The improved prospects of a bumper kharif harvest and favourable rabi season should also keep cereal prices in check," said Das at the MPC meet.
MPC member Mridul K. Saggar said fiscal impulse has weakened since Q2FY21 and, therefore, despite inflation persistence, pulling back the monetary support to aggregate demand will not be an apt choice at this juncture. "High inflation has persisted longer than predicted at the time of the preceding MPC meeting in early October. This was mainly due to unseasonal rains that caused vegetables price spike. As a base case, inflation should still start correcting in near months and fall below the upper-tolerance levels by December 2020," he said.
"Since February 2020 policy, RBI has announced liquidity measures adding to about ₹12.7 trillion. A significant portion of this liquidity has been parked back at central bank window. Therefore, it has not had a perverse effect on inflation so far," he said.
Jayanth R. Varma, another MPC member, said, "I fear that a sustained failure to defend the policy corridor could prove expensive in terms of creating inflationary pressures and inflationary expectations though, so far, low rates have been feeding into asset markets rather than goods price inflation."
RBI had on 4 December left interest rates unchanged for the third straight time amid persistently high inflation and said the economy was recuperating fast and would return to positive growth in the current quarter itself.
(With inputs from agencies)