The Reserve Bank of India (RBI) has now revealed the minutes of its Monetary Policy Committee (MPC) meeting held over March 24-27. And, just like the meeting, the minutes’ revelation too has been earlier than routinely scheduled.

On March 27, after an off-schedule virtual MPC meeting against a backdrop of the Coronavirus, also known as Covid-19, taking pandemic form, the central bank had cut the benchmark repo rate by a hefty 75 basis points (bps), or 0.75%, to 4.40%; slashed the reverse repo rate by a staggering 90 bps, or 0.9%, to 4%; and reduced the cash reserve ratio (CRR) by 100 bps, or 1%, to release ₹1.37 lakh crore into the system.

At that meeting, the RBI had decided to continue with the accommodative stance “as long as it is necessary to revive growth and mitigate the impact of Coronavirus on the economy, while ensuring that inflation remains within the target”. And, collectively, the measures announced by the MPC were seen as an injection of ₹3.74 lakh crore worth of liquidity into the financial system to help deal with the Covid-19 pandemic.

“We are living through an extraordinary and unprecedented situation,” RBI governor Shaktikanta Das had said in his post-policy address. Das had also added that everything hinged on the depth of the Covid-19 outbreak, its spread, and its duration. “Clearly, a war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in a continuous battle-ready mode.”

Das had also elaborated that since the earlier MPC meeting in February, the central bank had injected liquidity of ₹2.8 lakh crore through various instruments, equivalent to 1.4% of the country’s gross domestic product (GDP). With the measures announced on March 27, RBI’s liquidity injection had worked out to about 3.2% of the GDP.

Now, as the minutes of that meeting are out, economic observers are of the view that MPC members’ views diverged somewhat on future actions. According to a note by Rahul Bajoria, India economist with Barclays, divergences were seen, with some members calling for preserving a policy space for future rate actions as well as the need for a multi-pronged approach, while others downplayed inflation risks, and saw significant space for future policy actions.

“Critically, the minutes show that MPC members recognise the need to look beyond the inflation mandate, given the unprecedented crisis posed by the outbreak of Covid-19,” says Bajoria, who is of the view that a further 90 bps, or 0.90%, repo rate cut is in the offing over the coming months, and that with risks of a larger policy action.

“The timing of the next rate cut will likely be contingent on the government announcing its fiscal package and growing clarity on developments in the Covid-19 [pandemic],” Bajoria adds. But, given the comfortable consumer price inflation (CPI) scenario, and lockdown being extended, Bajoria expects the RBI to consider cutting rates as early as the second half of April by 40-50 bps, possibly in another emergency policy meeting.

Further rate cuts seem to be a given. Nomura economists Sonal Varma and Aurodeep Nandi project India’s GDP growth to average -0.5% year-on-year in 2020: from 3.2% expected in Q1 to -6.1% in Q2, -0.5% in Q3, and then barely recovering to 1.4% in Q4. “Consistent with this view on growth, we expect 75 bps of further policy rate cuts in 2020,” Varma and Nandi said in a note.

On the latest MPC minutes, the Nomura duo highlighted that unsurprisingly, the minutes reflected the MPC’s rapidly shifting policy priorities amid the Covid-19 outbreak, with the focus firmly on the downside risks to growth. “Most members overlooked the current inflationary pressures (CPI inflation above 6%) and took a year-ahead view of below-target inflation to justify the availability of adequate policy space within the existing framework,” the duo noted.

Within the minutes’ nuances, the Nomura economists highlighted RBI deputy governor Michael Patra underlining the need for the MPC to “rise beyond its mandate” and for monetary policy to take on an “avant-garde role”. The duo also pointed at MPC member Ravindra Dholakia’s mention that there is still “enough space” for more policy easing. “Even Dr. (Pami) Dua and Dr. (Chetan) Ghate, who dissented with a 50-bps cut, signalled data dependence: a view that implicitly agrees to more policy easing as the data worsen,” the duo noted.

In his note, Barclays’ Bajoria highlighted Ghate’s expression of some concern on inflationary projection, with risks such as unseasonal rainfall and supply disruptions in logistics as key factors to watch out for. “In addition, Ghate called for an ‘appropriate division of labour’ among fiscal, monetary policy, liquidity policy, and social insurance policies to mitigate the growth slowdown,” Bajoria noted.

Clearly, the MPC members were divided on the space for future rate cuts. Bajoria highlighted that while March 27’s 75-bps rate cut saw two members’ dissent (they voted for a 50-bps cut), the minutes shed further light on members’ perceptions of the future trajectory of interest rates. “Dholakia and governor Das saw clear space for future action by the central bank--both in terms of conventional and unconventional (liquidity) policies,” Bajoria noted.

Going forward, the Nomura economists are of the view that at the next MPC meeting (scheduled in early June), the members will most likely have to confront the first batch of data that captures the initial impact of the national lockdown, which the duo expects to show a significant deterioration. Furthermore, the duo says that food prices have spiked in April and inflationary pressures may not immediately abate, and MPC members will have to continue to rely on year-ahead forecasts of lower inflation to deliver further easing.

“In our baseline view, there are at least 25 bps of policy easing slated for the next policy meeting, although the MPC may choose to frontload more policy easing in view of growth risks,” Varma and Nandi added. “This will most likely be supplemented by other unconventional policies like a commitment towards aggressive open market operations, further liquidity injections via targeted long-term repo operations (including expanding its scope to target bank loans) and further forbearance measures.”

That the pandemic was the cause of overwhelming worry is evident by the fact that there are 55 mentions of the term ‘Covid-19’, while growth appears just 51 times across the minutes. And while turning to growth, the MPC said apart from the continuing resilience of agriculture and allied activities, most other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread, and duration.

“If the Covid-19 [pandemic] is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India,” the MPC said. “Downside risks to growth arise from the spread of Covid-19 and prolonged lockdowns,” it added.

And, now, with another 19-days extension to the nationwide lockdown, until May 3, the problems are just rising; and rising much faster than the number of Covid-19 cases in India.

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