Inflation remained a major concern for members of the monetary policy committee (MPC) at their August meeting and front-loading of the repo rate hikes found favour, showed minutes of the meeting released on Friday.
Reserve Bank of India (RBI) governor Shaktikanta Das said, “On the domestic front, though inflation has moderated and plateaued since its recent peak of April 2022, it remains unacceptably and uncomfortably high.” Despite early indications that inflation might have peaked in April, significant uncertainties remain on account of adverse global spillovers coming from simmering geopolitical tensions, volatile global commodity prices and financial markets, Das said.
Earlier this month, the MPC had voted unanimously to raise the repo rate by 50 basis points (bps) to 5.4%, which is above the pre-pandemic level of 5.15%, amid worries over persisting inflationary pressures.
While the let-up in global food and industrial metals prices should lower imported inflation, the appreciation of the US dollar could offset some of the gains, Das said in the minutes. “We will continue with ‘whatever it takes’ approach, given the new set of challenges and very high uncertainties that we are confronted with,” the governor said in the minutes. The MPC’s actions would continue to be calibrated, measured and nimble, depending upon the unfolding dynamics of inflation and economic activity, he added.
Deputy governor Michael Patra observed that inflation in India is lower than the weighted average of its major trading partners. High-frequency indicators suggest that there is some moderation in momentum in the first quarter of 2022-23 relative to the previous quarter, but the momentum is still positive in sharp contrast to the rest of the world. Monetary transmission is stronger to lending rates currently, but deposit rates have commenced the catch-up.
“All in all, the Indian economy is running a positive growth differential vis-à-vis the rest of the world. Monetary policy, unseen and unsung, has played a key role in this swivel,” Patra said, adding that the inflation target may be breached for a prolonged period. Front-loading of monetary policy actions can keep inflation expectations firmly anchored, re-align inflation with the target and reduce the medium-term growth sacrifice as it is timed to the recovery underway. “Small steps over a prolonged period could allow inflation to get entrenched and inflation expectations unhinged,” Patra said.
External member Jayanth Varma, while voting in favour of the 50-bps hike, expressed reservations about the stance of the policy, which was to focus on withdrawal of accommodation to contain inflation, while supporting growth. In the minutes, Varma wrote this statement confuses more than it clarifies. Since the rate hike in the August meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation” cannot refer to the withdrawal of pandemic-era accommodation, Varma said.