Off-cycle rate hike done to avoid tougher move in June: Monetary Policy Committee minutes explain rationale behind RBI action

Waiting for June MPC would mean losing that much time while war-related inflationary pressures accentuated, Das said

According to Varma, inflation risks became sharper in terms of magnitude and in terms of persistence since April.
According to Varma, inflation risks became sharper in terms of magnitude and in terms of persistence since April.

By Shashank Didmishe

Several storms hitting together prompted the Monetary Policy Committee (MPC) to go for an off-cycle hike of 40 basis points in the repo rate on May 4, according to the minutes of the rate-setting panel released on Wednesday. “As several storms hit together, our monetary policy response should be seen as an important step to steady the ship. The Indian as well as global evidence clearly shows that high inflation persistence hurts savings, investment, competitiveness and growth,” the minutes quoted Reserve Bank of India (RBI) governor Shaktikanta Das as saying.

Das listed rising global commodity and food prices, power tariffs and the Russian invasion of Ukraine as major factors which caused inflation and impacted growth. The impact of these factors is likely to remain much longer than expected. “Hence, it becomes necessary to act through an off-cycle policy meeting. Waiting for one month till the June MPC would mean losing that much time while war-related inflationary pressures accentuated. Further, it may necessitate a much stronger action in the June MPC which is avoidable,” Das said.

RBI deputy governor and MPC member Michael Debabrata Patra said at the meeting, held on May 2 and May 4, that in this milieu, a measured approach and a cool head are warranted. “Recent incoming data suggest that India’s macro-fundamentals, barring imported food and fuel inflation, are still intact and in sync with the recovery that has been tenaciously making its way through waves of the pandemic,” Patra observed.

The minutes cited professor Jayanth R Varma as saying that since the growth shock to the Indian economy is less severe than expected and estimates suggest that the economy is coping reasonably well with the geopolitical tensions and Chinese lockdowns, it has become necessary to front-load the rate action. According to Varma, inflation risks became sharper in terms of magnitude and in terms of persistence since April.

It appears to me that more than 100 basis points of rate increases need to be carried out very soon. My preference, therefore, is for a 50-bps increase in the repo rate in this meeting,” he said. “Moreover, there is a lot of catching up to do because the MPC (a) rightly prioritised economic recovery at the height of the pandemic in 2020 and early 2021, and (b) delayed the normalisation by continuing the forward guidance for far too long after the pandemic abated.”

Varma said the reasons for only a 40-bps increase were not clear to him because any psychological benefit from keeping the hike below 50 bps was outweighed by the simplicity and clarity of moving in multiples of 25 bps. “Also, reducing the hike by 10 bps now would require an extra 10-bps hike at some point (and perhaps sooner rather than later),” he said.

All the six members of the MPC voted to raise the repo rate by 40 basis points to 4.4%, the first increase since August, 2018. The MPC also unanimously voted to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. The next meeting of the MPC is scheduled for June 6 to 8.

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