Das wrote that the outlook on inflation had improved and the inflation projection for FY22 had been revised downwards by 40 basis points (bps) to 5.3%.
With the outlook on inflation improving and projections for the same easing, there is a need for continued monetary support to a still-recovering economy, Reserve Bank of India (RBI) governor Shaktikanta Das wrote in the minutes to the October meeting of the Monetary Policy Committee. However, other RBI executives on the rate-setting panel flagged risks emanating from high fuel prices and stressed the need to remain focused on inflation-targeting.
Das wrote that the outlook on inflation had improved and the inflation projection for FY22 had been revised downwards by 40 basis points (bps) to 5.3%. The medium-term focus of the MPC has successfully moderated undue expectations of a possible reversal of the monetary policy stance and is helping anchor expectations in the right direction, while navigating the economic recovery from the crisis. “At this critical juncture, our actions have to be gradual, calibrated, well-timed and well-telegraphed to avoid any undue surprises,” he said.
While observing that lower food prices may take the headline inflation numbers down in Q3, RBI deputy governor Michael Patra observed that fuel inflation being at an all-time high posed risks to the upside. It was, therefore, important to remain on guard about second=order effects from these transitory disturbances that could make some components of inflation more persistent.
However, pressures from wages and rentals remain muted and staff costs in the organised sector are rising again as hiring and normal work processes resume. “There is also some evidence forming that cost pressures may not be able to be absorbed any longer and selling prices may turn up. Thus, while the trajectory of inflation may undershoot the projections made in August, it is likely to be uneven, sluggish and prone to interruptions,” Patra wrote.
The RBI executive director Mridul Saggar stressed on the need to remain data-dependent. Capital flows can turn volatile in either direction if taper paths come with surprises. “Amid these uncertainties, policies will need to respond with alacrity and should be untangled from any pre-commitments,” Saggar said, adding, “If at all some guidance is needed at this stage, it has to be a soft one; with the Reserve Bank preparing markets that while policy stance is likely to remain accommodative till growth is revived on a durable basis, liquidity levels will be adjusted dynamically to appropriate lower levels that are still consistent with accommodative stance.”
Further, Saggar said that the MPC needs to reinforce its commitment to the assigned inflation target guided by data inflows on growth, inflation and other parameters. It also needs to now focus more on risks to both inflation and growth and calibrate policies as the situation evolves. “…in my judgement, if no new disruptions to growth emerge, output gap will close sometime in 2022-23 and monetary policy should start to gradually reposition to lowering underlying inflation and inflation expectations next year,” Saggar said.