Two out of the six-member monetary policy committee (MPC) -- Chetan Ghate and Pami Dua -- voted for a lower 50 basis points reduction in the repo rate against 75 basis points decided by the committee. The Reserve Bank of India announced an out of turn repo rate cut of 75 basis points to 4.4 per cent, a week ahead of the scheduled MPC early this month. These two external members in the committee, also professors of economics, have given their views on the monetary policy direction and also the steps and the adequacy of the fiscal policy measures.
Govt's Rs 1.7 lakh-crore package a relief measure not a stimulus
Chetan Ghate, a distinguished economist, has termed the current fiscal stimulus (Rs 1.7 lakh crore which is about 0.8 per cent of GDP) more in the nature of a relief measure (he calls it social insurance) rather than a stimulus. "A relief is not a permanent fix," he says, adding that the effect of this measure will lead to a small rise in consumption in the short run, but it will dissipate quickly.
More structural reforms needed than cutting rates
Ghate, who teaches economics in Delhi's Indian Statistical Institute, also said that in a demand deficient economy like India, a large rate cut will be akin to pushing on a string. "I have been raising this concern in several previous policy reviews justifying the need for more structural reforms. This concern prevents me from voting for an even larger cut in the policy rate this time," he says.
Fiscal policy to play a major role
Pami Dua, former director at Delhi School of Economics, says that the top-most priority should be to minimise the negative impact of the pandemic on the economic growth. "This necessitates a multi-pronged approach comprising monetary, fiscal and other policy measures, as well as steps to contain the spread of COVID-19. Fiscal policy has a major role to play in combating the economic effects of the pandemic," she says. In fact, the market is still awaiting the second stimulus by the government.
Prudent to conserve some policy space for later
Dua says, in the current scenario, with heightened uncertainty and near standstill economic activity, a bigger rate cut may not necessarily lead to an increase in borrowing, but should raise consumer confidence and investor sentiment, going forward. A London School of Economics graduate Dua suggested that the MPC should better conserve some policy space for later, when those binding constraints are removed and the economy will require a further boost to recover from the pandemic.
Covid-related supply chain disruption raises upside risk to inflation
Ghate raises a concern that unseasonal rains, if any, and COVID-19 related lasting supply side disruptions in the food sector also pose an upside risk to the inflation trajectory in 2020-21. "These need to be carefully watched," he warns.