Wait And Watch

The Indian Express     22nd August 2020     Save    

Context: The sharp spike in retail inflation is restricting the space to ease monetary policy further to support growth, despite expectations of unprecedented contraction in real GDP.

Various challenges before the Monetary Policy Committee (MPC)

  • Justifying the credibility of inflation data: 
    • Estimation of inflation by the  National Statistics Office (NSO) for the period of lockdown (April-May) have recorded strong reservation based on accuracy.
  • Uncertainty due to COVID:
    •  If inflation does indeed trend lower on the lines of the RBI/MPC’s expectations, then it could open up space for further easing monetary policy.
    • If inflation continues to remain elevated, then it will restrict/contract the monetary policy choices available to MPC, despite it being driven largely by supply-side shocks. 
    • If inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by the mandate to undertake remedial action.

Conclusion: Given the uncertain inflation outlook, MPC must reconcile its inflation-targeting mandate with the continuing weak growth impulses.