‘Inflation Whipsaw' And ‘Hysteresis' Can Be Aftereffects Of Covid: RBI's MPC

In the minutes of the RBI MPC's meet held between August 4 and August 6 released today, it is showed that the committee unanimously voted for the status quo on key policy rate. Further there is suggested that RBI should be prepared to act as and when needed for reviving the economy affected by the Covid 19 pandemic.

‘Inflation Whipsaw' And ‘Hysteresis' Can Be Aftereffects Of Covid: RBI's MPC

Since February 2019, the RBI has slashed repo rate from 6.5 per cent to 4 per cent currently and also the MPC infers that the price rise being witnessed for some time now may be a temporary phenomena.

Also the central bank's monetary policy committee (MPC) discussed in detail the impact of the pandemic on the country's growth prospects going forward, inflation outlook as well as general human behavior.

MPC members further cautioned on the task being difficult for policymakers as they tried to establish a balance by providing stimulus to support the weakening economy at one end while also keeping inflation rate 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 attended his last monetary policy meeting together with other members Ravindra Dholakia and Pami Dua.

Also he discussed on the Princeton professor's seminar in May, that mentioned about the relationship between different elements triggering opposing conditions of inflation on one end and deflation on the other, amid the pandemic and money printing being mulled upon by governments as well as 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." On the losses in output, the MPC member inferred that the "worst is almost surely behind us"

Also he suggested that macro policy should be adjusted such that the temporary Covid 19 related economic shock does not get 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.

Nonetheless, RBI chief asserted that while there is still scope for monetary policy measures "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.

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