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Fifteenth EGROW Shadow Monetary Policy Committee Meet held on April 3, 2021


Recording of the event

Key Takeaways

  1. The rise in COVID cases has been exponential as compared to last year. Normalcy may take longer than expected.
  2. Private investment was down and hoping for more public investment which did not took place as hoped.
  3. Funding fiscal deficit will be a major challenge
  4. GST collection has been in record high which is good sign during this pandemic.
  5. The quantum of liquidity should remain unchanged.
  6. The MPC has to strike a balance between elevated core inflation and headwinds for growth emerging from the second wave of the pandemic.
  7. The RBI and the Government should consider pausing/suspending Inflation Targeting for a year and focus exclusively on growth and investment.
  8. RBI should keep Interest rate low to help in government huge borrowing plan.

Recommendation of EGROW Shadow MPC

Members of EGROW SMPC - 5
Stance - Accommodative - 5 members
Repo Rate - Retain at 4 percent - 4 members
Reduce by 25 bp

Non Members - 3
Stance - Accommodative - 3
Repo Rare- Retain - 3

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman, EGROW Foundation

After the outbreak of the covid-19 pandemic, 60 percent of the economy was shut down. The rest 40 percent of essential goods (food, health, telecom) were functioning more of less normally. The digital economy boomed, with a spurt of innovation & numerous startups.

EGROW research at the start of the pandemic, had projected a two-speed recovery. A slow recovery for the Contact services (trade, transport, hotels restaurants, tourism, hospitality, personal services) most affected by Covid contagion, and Manufacturing, mining, Construction & related services (MMC&S) recovering much faster. This two-speed recovery pattern has in fact materialised in India, with the former recovering a little slower, and the latter normalising a little faster, than initially anticipated by us. The latter is confirmed by the rise in corporate investment intentions, reflected in FY21 Q3 data for public listed companies, and the rise in GST+Income tax collection increase in FY21 over FY20, despite a big decline in GDP.

In the transition to normalcy EGROW research had anticipated supply chain disruptions, logistics problems (delays & costs), and bi-directional supply-demand imbalances, with some products in some geographies facing excess demand & inflationary pressures and different products in other geographies having excess supply problems and deflationary pressures. This pattern too has occurred as predicted, not just in India but in many other countries and globally.

As the food sector was already normal with respect to the pandemic, at the start of the transition, weather variations had the usually expected results on its output and price inflation (eg effect of drought on vegetable production & prices)

Domestically and globally, a temporary form of new normal is taking shape. Risk averse, since individuals are unwilling to risk contacting COVID by participating in “Contact services”, demand has shifted away from these services, towards goods market. This has led to an unanticipated spurt in demand for certain consumer goods, resulting in spurt in prices of goods with short term inelastic supply. This has fed back into prices of certain inputs and the logistics chains connected with them. Disruptions in the supply of semi-conductors and the rise in some commodity prices are likely linked to these supply chain & logistic disruptions and change in demand patterns. Many of these changes in prices are part of the spurt in core inflation in India & elsewhere.

An example of this scenario can be seen in the 20% increase in throughput at the Chicago port, with consequent increase in delays and logistic costs. The impact on core inflation will remain till demand patterns are normalised after the level of vaccination reaches a level at which people feel safe to use contact services at traditional levels. Complete vaccination takes place.

A lot of uncertainty still exists for monetary and fiscal policy. As far as contact services are concerned, Govt and monetary authorities must pay more attention to this sector. To ensure safety and boost this sector, incentives must be given for installation of virus quality air filters and UV lights which kill the virus. This is particularly important for closed spaces like malls, cinema & marriage halls, hotels, restaurants, airports, and public bathrooms. To some extent, large hotel chain has got this message and has changed their operations.

US GDP is expected to go up along with real interest rates and USD value. This will Impact the capital inflows into India and make interest rate management more difficult.

As both global and domestic uncertainty about GDP and inflation remains high, I recommend and expect, RBI MPC to keep repo rates on hold, keep liquidity on even keel, and forward guidance accommodative.

2. Indranil Sengupta, Chief Economist, Bank of America Merrill Lynch

We continue to expect the RBI MPC to remain on hold through FY22 and hike rates by 100bp in FY23. The RBI will likely try to fund the high fiscal deficit without adding to surplus liquidity/M3 growth through - a) US$50bn of OMO in FY22 combined with LTRROs; b) 3% hike in banks’ HTM limits, extended to FY26 and c) forward FX intervention. We continue to expect the RBI to buy FX if the USD weakens and let INR depreciate if it strengthens.

3. Ms. Upasna Bhardwaj, Senior Vice President, Kotak Mahindra Bank

I expect the MPC to maintain status quo both on rates and stance for now given that downside risks to growth are resurfacing from the surge in COVID infection. Further the assurance by RBI to ensure smooth government borrowings should refrain them from any change in the near term. However going ahead global backdrop is turning adverse and core inflation continues to pose upside risks. This should prompt RBI to begin policy normalisation sometime during mid-year. While the quantum of liquidity should remain unchanged through most of FY22, I expect that the cost of the overnight liquidity will begin to rise from Aug/Sep through tools like excessive reliance on tools like overnight variable reverse repos or SDF. This should be followed by hike in reverse repo towards 3QFY22 although repo rate should remain unchanged through the year.

4. Mr. Abheek Barua, Chief Economist and Executive Vice President, HDFC

The MPC has to strike a balance between elevated core inflation and headwinds for growth emerging from the second wave of the pandemic. The optimal response would be to keep policy rates unchanged. OMOs need to continue to cap GOI's borrowing costs and interest rates in general and should focus more on longer durations. USD and U.S yield likely to be firm and capital outflows are likely to act as an offset to liquidity build up from OMOs. The stance should remain accommodative for the rest of the financial year.

5. Dr. Charan Singh, CEO and Director, EGROW Foundation

The recovery in the economy has been uneven. According to the IIP data of Jan 2021, the index of mining and manufacturing is still less than Feb 2020 (before COVID hit India) while that of electricity is higher than February 2020. The data for 8 core industries for February 2021 reveals that except electricity, all other industries were performing below the level of February 2020. The inflation indicators are within range - WPI for all commodities is 4.17 for February 2021 while food is 3.31 and CPI is 5.03 (overall) and 3.87 (food), respectively. The output growth is uncertain - IMF had earlier predicted 11.5 percent for 2021 and 6.8 percent in 2022 but two days back, World Bank has placed India's growth at 10.1 percent for 2021-22. On April 5, IMF will release the latest estimates.

On banking the year is expected to witness many changes - privatisation of 2 banks, and bad bank and DFI is being created. The RBI has projected GNPAs of 13.5 percent in September 2021 in normal conditions and 14.8 percent if stress increases. These estimates were made in in December 2020. With the change in situation with second wave, expected to be more severe than first wave, the situation could become grim.

In the latest research presented by Dr S S Bhalla, ED, IMF in a webinar at EGROW on April 1, 2021, it is clear that Repo rate does not impact inflation but investment and growth. Hence, the RBI and the Government should consider pausing/suspending Inflation Targeting for a year and focus exclusively on growth and investment. Also, the Repo rate should be reduced by 25 bp to give a clear signal and monetary policy should continue to be accommodative.

Guest Panalists

1. Shri Rishi Gupta, Co-Chairman, ASSOCHAM National Council for Banking and MD & CEO, Fino Payment Bank Ltd.

Services are getting impacted in different ways. Our volumes have doubled in the last year due to pandemic. Different types of new services have emerged. Going more local and digital norm is becoming a permanent change. The customers are preferring closer institutions and digital platforms for banking purposes. There is a disruption in the economy. COVID cases are surging especially in Mumbai. The number of people getting vaccinated will be going up. We need a hybrid model of lockdown and vaccination. The government target of 4% +/- 2% can work. As per the recent budget, the government maintained resources to boost employment. MNREGA did excellent work during the pandemic in providing employment. Banks should be pushed to do corporate loans as well. We should maintain the status quo with an accommodative stance.

2. Shri S. C. Aggarwal, Senior Member, ASSOCHAM & CMD, SMC Group

RBI should keep Interest rate low to help in government huge borrowing plan. Inflation rise is a big challenge in the economy and industry. Last year also we saw supply chain disruption as a major challenge. The WPI went from 2.26% to 4.47%, which need to be addressed. RBI projection of 5% till September will be another challenge. Second wave of COVID going around with more than 80,000 cases yesterday cannot be ignored. The government securities yields have been rising globally. GST collection has been in record high which is an excellent indicator. Government securities yield is also a benchmark for other index such as bonds. RBI should not change the rates. MPC is expected to be at status quo with accommodative stands.

3. Shri Sibasish Mishra, Director, Acceptance Re Innovation Technology

  • It is very challenging time due to pandemic.
  • There is great challenge due to adoption of digital part in undertaking business.
  • RBI has an inflation of 4% target with upside of 6% and downside to 2%.
  • Ministry of Finance and RBI has done a commendable job during the pandemic and should continue to do the same.