Majority of the Monetary policy committee (MPC) members emphasised on the rising risks of a persistently high inflation in the last round of monetary policy meeting, according to the minutes of the meeting released on April 22.
“The current geopolitical situation has led to an upward revision of our inflation projections for 2022-23. The estimates now point to inflation remaining above the upper tolerance band in the near-term even as growth projections have undergone downward revisions,” Reserve Bank of India Governor and head of the six-member Monetary Policy Committee Shaktikanta Das, said in the minutes of the panel’s latest meeting. “These are indicative of the sheer magnitude of the adverse exogenous supply and price shocks.”
While the risks to domestic growth call for continued accommodative monetary policy, inflationary pressures necessitate monetary policy action, Das said in the minutes.
The circumstances warrant prioritising inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability, while being mindful of the ongoing growth recovery, the governor added.
Michael Patra, a deputy governor of the RBI, said that as the projections show, if inflation persists in high reaches, the drainage of liquidity already achieved and planned for the year ahead will reduce risks of excess liquidity fanning inflationary pressures and posing threats to financial stability.
In the latest policy on April 8, the MPC had held the benchmark repo rate steady for the eleventh straight time at a record low of 4 percent but narrowed the policy corridor by introducing a so-called Standing Deposit Facility at a rate of 3.75 percent. The MPC had signalled that it is now shifting to a ‘less accommodative’ stance in the backdrop of heightened inflationary risks.
India’s consumer price inflation (CPI) rose to a 17-month high of 6.95 percent in March and wholesale price inflation (WPI) stayed in double-digits for 12 consecutive months. Most economists expect the MPC to hike the repo rate at its next meeting in June.
The MPC is mandated to target inflation at four percent with a tolerance band of two percentage points on either sides.
In the latest policy, the MPC had revised its retail inflation forecast upwards to 5.7 percent for the current financial year that began April 1, as compared with 4.5 percent projected earlier. This was because of rising geopolitical tensions between Russia and Ukraine had sent crude oil prices to multi-year highs.
Meanwhile, external member Jayanth Varma said that it was “wholly appropriate” to drop the word “stance” from the monetary policy resolution.
“In the extremely uncertain situation that prevails today, it is very important for the MPC not to issue any forward guidance that would tie its hands,” Varma said in the minutes. “It is necessary to communicate clearly that in future meetings, the MPC would consider itself completely free to take any action on the policy rates that may be warranted by the data that becomes available in the coming weeks.”
Varma, who has been arguing for the normalization of the policy corridor for several months now, added that was “imperative” for the MPC to communicate its resolve to ensure that inflation remains within the target going forward.
According to Ashima Goyal, the policy in the future will either pause or raise rates. A rate rise that responds to excess demand, as well as to persistent inflation, so that the real rate adjusts smoothly and does not deviate too far from equilibrium will best be able to anchor inflation expectations yet sustain the growth recovery while minimising market volatility and output sacrifice, Goyal said in the minutes.
“Rebalancing of liquidity started in 2021, and has now reached a level, with new facilities to absorb liquidity, that is compatible with raising policy rates. Short rates are set to rise to make the repo rate the operational policy rate again,” Goyal added.
External member Mriddul Saggar said that with a wide variety of tools, it should be possible to bring back inflation closer to the central bank’s target, without much growth sacrifice and without a very high terminal rate. Meanwhile, another member Shashank Bhide added that the MPC needs to tackle the evolving price conditions and broadbased policy measures to effectively bring down inflationary pressures without disrupting the favourable environment for sustaining growth.
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