Two of the committee members RBI deputy governor Michael Patra and executive director Mridul K. Saggar expressed their concerns over a long protracted recovery if the GDP contraction continues while others like Governor Shaktikanta Das and the newly inducted member Shashanka Bhide expect a strong revival before the end of the year.

The MPC kept the key lending rate unchanged, at 4% in the last policy review and voted to maintain “accommodative” monetary policy stance at least during the current financial year and into the next financial year.

According to the minutes, Patra spoke about the need to exercise pragmatic caution even as some high frequency indicators indicate a sequential improvement. He said that it may take years for the economy to regain the lost output.

“If the NSO’s provisional estimates for Q2 that are expected at the end of November corroborate at least the direction of these forecasts, India has entered a technical recession in the first half of the year for the first time in its history,” Patra said.

“Nonetheless, if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-COVID level by the end of 2020-21 and it may take years to regain this lost output. There is also an anecdotal sense that the economy’s potential output has fallen, and the post-COVID growth trajectory will look very different from what has been recorded so far,” Patra added.

Saggar, too, concurred that the output gap will close only towards the end of the fiscal year. The output gap is an economic measure of the difference between the actual output of an economy and its potential output.

“The GDP is likely to contract close to double-digit mark in Q2:2020-21. A range of model-based exercises, as well as my judgment superimposed on these, suggest that output gap in terms of levels of GDP will close only towards the end of 2021-22,” Saggar said.

Das, on the other hand, was more optimistic about a strong economic rebound by next year.

“Overall, we expect a likely reduction in the rate of contraction in GDP during Q2FY21 and a return to positive growth by Q4FY21. Despite sequential improvement in Q3 and Q4, the full year GDP is expected to contract by 9.5 per cent with a strong rebound next year,” said Das.

The MPC has cut repo rate by a cumulative 250 basis points (bps) since February, 2019. One bps is one hundredth of a percentage point.

Economists infer that chances of rate cut going forward could get pushed beyond the current fiscal year with inflation continuing to stay stubborn.

“Based on our reading of the minutes, we anticipate that the accommodative stance will persist for an extended period of time. While the MPC members clearly desire to support the economic recovery, inflation may not oblige by falling fast enough to allow for speedy or substantial rate cuts. In our view, the incoming price data suggests that the chances of a February 2021 rate cut have dimmed,” said Aditi Nayar, Vice President, ICRA.

Other economists like Soumya Kanti Ghosh of State Bank of India observed that the MPC for the first time discussed policy measures other than rate cut.

“The MPC minutes correctly emphasise that the current circumstances require communication to be the primary vehicle in policy itself. Such explicit forward guidance is an apt signalling device to align the market and RBI expectations of a lower term structure of interest rates. The MPC minutes is also an indication that unconventional policy measures will take prevalence over rate cuts in future,” said Ghosh.

Jayant R Varma, the new MPC member and the only one who voted against an accommodative stance on technical grounds, explained the need to articulate the forward guidance with more clarity.

Verma’s dissent pertains to the forward guidance which says, “MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward”.

Varma said that the date based forward guidance is not a decision but an expectation and MPC should be careful in its choice of words as it risks damage to its credibility. “I prefer the word “expected” because it would preserve the commitment of the MPC to respond aggressively to inflation shocks that lie well above the upper band of the fan chart,” Varma said.

The other new member Ashima Goyal said that the accommodative stance and the benign financial conditions will support growth. The repo rate pause together with inflation guidance given will contribute to anchoring inflation expectations.

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