Even so, marginal moderation in inflation has twice this year provided just in time relief -- pointing again towards supply-side causation and volatility, she said.
Given the uncertainties on account of the COVID-19 pandemic, Reserve Bank Governor Shaktikanta Das opined that continued policy support with a focus on revival and sustenance of growth was the most desirable and judicious policy option at the moment.
Das, according to the minutes of the MPC meeting released on Friday, also underlined the need for closely monitoring the price situation with a view to anchoring inflation expectations.
“The need of the hour is twofold: first, continue the monetary policy support to the economy; and second, remain watchful of any durable inflationary pressures and sustained price momentum in key components so as to bring back the CPI inflation to 4 per cent over a period of time in a non-disruptive manner,” he said.
All members of the Monetary Policy Committee (MPC) — Shashanka Bhide, Ashima Goyal, Jayanth R Varma, Mridul K Saggar, Michael Debabrata Patra and Shaktikanta Das — had unanimously voted to keep the policy repo rate unchanged at 4 per cent after the three-day meet of the panel earlier this month.
Further, except Varma, other members voted to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
Varma expressed reservations on this part of the MPC resolution, according to the minutes.
RBI Deputy Governor Patra said amid the extreme uncertainty encircling the path of the pandemic, monetary policy authorities have sought to impart some certainty by a commitment to a stance of accommodation extending into the future.
With the upsurge of inflation worldwide, this effort to anchor expectations is under scrutiny. Patra said in some countries, markets have acquiesced with the authorities’ view that inflation pressures are transitory and do not warrant a change in the policy stance.
In others, central banks have pre-emptively tightened the policy stance despite assessing inflation as transitory.
“This is a razor’s edge dilemma and responding to it, in my view, involves a judgment call that puts both foresightedness and inflation fighting credibility on the line,” he said.
Saggar, who is RBI’s Executive Director, opined policy focus to revive growth on a durable basis needs to continue and should entail consideration to avoid inflation risks that may emanate when credit demand improves, likely ahead of output gap closing.
This arduous task needs to be carried without endangering sustainable recovery in growth, he said.
External member on the MPC Varma was of the view that economic growth was unsatisfactory long before the pandemic, and even if the economic ill effects of COVID-19 abate to some extent, substantial monetary accommodation is warranted.
Persistent high inflation means that the monetary accommodation has to be somewhat restrained. He argued for raising money market rates towards the repo rate of 4 per cent from the current ultra-low level of 3.35 per cent.
Another external member on the panel Ashima Goyal said the MPC has a difficult job as it battles both the slowdown and the inflation which the pandemic has triggered.
Even so, marginal moderation in inflation has twice this year provided just in time relief — pointing again towards supply-side causation and volatility, she said.
Goyal said research shows that while temporary commodity spikes are looked through, a persistent rise tends to affect inflation expectations.
According to her, the volatility of Indian fuel prices is much lower than international and average rise is more, since taxes are not decreased as much when international oil prices rise, as they are increased when oil prices fall.
“A persistent rise in Indian fuel prices is at odds with inflation targeting,” she said.
The government has mandated the RBI to ensure inflation remains at 4 per cent, with 2 per cent margin on either side.
MPC member Bhide was of the view that with faster expansion of vaccination program, better health care infrastructure and measures by the public to prevent the spread of COVID infections, the rise in consumer sentiments can be expected to be sustained and supportive of the expansion of supplies.
All policy measures are needed to achieve normalisation of economic activities and moderation of inflationary pressures, Bhide said.