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The minutes of the April monetary policy revealed one member of the monetary policy committee (MPC) to be questioning the repercussions of low interest rates for savers and another suggesting that flattening of the yield curve be pursued through instruments outside the remit of the MPC. Reserve Bank of India (RBI) governor Shaktikanta Das said that it is still too early to offer explicit forward guidance on the course of monetary policy.
RBI executive director Mridul Saggar said that the credit channel that works in tandem with the interest rate channel is far more important than the asset price channel for effective monetary transmission. Countries have certainly relied on negative nominal or real rates in an attempt to avert deep recessions. In part they have helped limit job losses and scarring. “However, these benefits have to be weighed against the low interest rates fuelling K-shaped recoveries with increased inequalities and inflicting financial repression for savers,” he wrote.
Das said that the forward guidance provided by the MPC – to remain in accommodative stance for as long as necessary to sustain growth on a durable basis – lays out the future course of monetary policy. “Given the uncertainties and the fact that we are in the beginning of a new financial year, it is too early to give explicit time-based forward guidance,” he wrote, adding that the forward guidance in terms of securing a sustainable growth on a durable basis itself testifies to the MPC’s commitment to continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target, going forward.
Jayanth Varma observed that the principal motivation for the forward guidance was to reduce long term yields in the backdrop of an excessively steep yield curve. “Unfortunately, forward guidance has failed to flatten the yield curve, and I see little merit in persisting with it any more,” he said. While a flattening of the yield curve remains an important goal, it must be pursued using other instruments which largely lie outside the remit of the MPC, he added.
Deputy governor Michael Patra said that the inflation print for February reflects pandemic effects in the form of input cost pressures – though still muted in translating into selling prices – retail margins and increased costs of doing business as supply chains are still mending. “Accordingly, I would continue to look through the recent elevation in inflation and remain focused on reviving the economy on a path of strong and sustainable growth,” he wrote.
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