Members of the Reserve Bank of India’s Monetary Policy Committee (MPC) deliberated at length about the effects of the COVID-19 pandemic on growth, inflation and human behavior in general at the meeting held on August 4-6 even as the committee decided to hold the benchmark interest rate.

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Minutes of the meeting, released today, showed that MPC unanimously agreed that to stand pat on interest rates but also said the RBI should be ready to act to further help the economy when needed.

Between February 2019 and now, the MPC has cut the benchmark repo rate by 2.5 percentage points, from 6.5 percent to 4 percent, and opined that the recent spike in inflation may be temporary.

Members of the MPC, however, cautioned that the task of policymakers would be difficult as they balanced the need to stimulate the economy after the COVID-19 shock while trying to keep inflation in check.

“The prospect of an “inflation whipsaw”, a phrase used by Markus Brunnermeir at Princeton, is probably the right way to look at inflation going forward, i.e., there are different inflation/deflation pressures that need to be watched carefully,” said MPC’s external member Chetan Ghate, who participated in his last monetary policy meeting, along with the other members Ravindra Dholakia and Pami Dua.

Ghate was referring to the Princeton professor’s seminar in May, which talked about the dynamics between factors that are driving opposing forces of deflation and inflation, in light of COVID-19 shock and the money printing exercises convened by governments and central banks globally.

“On the upside, a perfect storm of cost push pressures, accommodative monetary policy, and adverse food supply shocks could lead to a pickup in inflation,” Ghate said. “On the downside, the paradox of thrift, i.e., forced saving pressure induced by a “de-facto” lock-down, could be a potent disinflationary force.”

In terms of output losses, the MPC member said that the “worst is almost surely behind us”.

Ghate also warned that macro policy must ensure that a “temporary COVID-type shock to the Indian economy does not become permanent.”

“Economists call this hysteresis," he said, referring to the phenomenon where a temporary phenomenon brings about a permanent change in society.

"In a post-COVID world… hysteresis will be driven by human behaviour. Despite the economy opening up, people will still hesitate to go out and spend,” Ghate noted.

RBI Governor Shaktkanta Das maintained that while there was headroom for further monetary policy action, “at this juncture it is important to keep our arsenal dry and use it judiciously.”

“I also feel that we should wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads,” he said.

First Published:Aug 20, 2020 5:26 PM IST