Today's Monetary Policy Statement for 2020-21: RBI should reduce the repo rate by 0.5% to 3.5%

Estimates of growth in FY 20-21 vary from 1% to a negative 9.5 %. My simple spreadsheet in June suggested a negative 10% for 20-21 was plausible . In the Monetary Policy Committee's 's own words, "the macroeconomic impact of the pandemic is tuning out to be more severe than initially anticipated".

Against this scenario, the RBI should clearly focus on generating some growth in an unprecedented depressed scenario.  I therefore feel that RBI should focus on the real interest rate - and strive to keep it negative for a extended period of time till there is clear evidence of revival of demand and supply in the economy. Please see my earlier blogs on the subject:  "Monetary Policy: A look back over the last year" dated July 27, 2017 ,  "A review of monetary policy: there is a serious need to correct flawed policy execution" dated June 5, 2019, and "A review of monetary policy: there is a serious need to correct flawed policy execution" dated December 3, 2019.

The MPC is of the view that consumer price inflation will return to the target level of 4% with a band of +/- 2% by the end of the FY 20-21, as supply disruptions ease in the economy given the COVID 19 situation.  Let's say inflation returns to 5%.

Negative real rates have now begun to emerge in the economy. With the one-year T bill rate at 3.6% and inflation at 5%, the real rate is 1.4%.  I feel given the unprecedented demand and supply shock to the economy as a result of COVID 19, we should look at the real rate in the region of -2% for a period of time till there is evidence of revival of demand and supply in the economy. 

I therefore suggest that RBI should reduce the repo rate further by 0.5% to bring it down to 3.5%. Market conditions are already reflecting this level.

Should the moratorium on loans be extended beyond August 31? My view is RBI should apply this only to sectors clearly impacted by COVID 19 -such as hospitality, airlines, restaurants - and leave it to banks to have the final say in the matter.