A premature pause in monetary policy action would be a costly policy error at this juncture, said Reserve Bank of India (RBI) Governor Shaktikanta Das, the minutes of the last MPC meeting showed. In the meeting held between December 5-7, the Monetary Policy Committee hiked interest rates by 35 basis points to 6.25% while remaining focused on ‘withdrawal of accommodation.’ While Shashanka Bhide, Ashima Goyal, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das voted to increase the policy repo rate, only Jayanth R Varma voted against the rate hike. RBI has raised key interest rates by 225 basis points since May this year to tame rising inflation.
Inflation: RBI MPC minutes show why it still remains a concern
“Considering the prevailing policy repo rate, liquidity conditions and the expected trajectory of inflation over the next several months, it is essential to persist with the stance of withdrawal of accommodation. Core inflation (CPI excluding food and fuel) is exhibiting persistence at around 6% for the past few months. Hence, there is no room for complacency and the battle against inflation is not over. This necessitates a constant vigil on prices,” Governor Das added.
The consumer price index (CPI) inflation rate eased to 5.88% in November, below the RBI’s upper tolerance range of 6%. Showing concerns over the increased inflation, Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research said “The persistence of core inflation at the upper limit of the tolerance band of the inflation target is of particular concern. Slippage on both growth and inflation objectives together would be a poor outcome.”
RBI monetary policy’s effect on containing inflation
Highlighting the effects of MPC and inflation expectations for the next 12 months, Deputy Governor Michael Patra said, “the effects of monetary policy actions taken so far, supported by improvements in supply responses, could break the 7% plus drift in average headline inflation and at best contain it in the range of 5-6 per cent over the year ahead. Thus, inflation can be expected to remain above target over the next 12 months.” The world has been under pressure for the last three years due to Covid 19 pandemic and the Russia-Ukraine war. As the global economy is at risk of slipping into recession, India has so far performed much better than its peers.
Analysts expect a 25 basis points hike in the February meeting
“Forward real rates are still sub-1% – RBI
“The MPC’s stance on the withdrawal of accommodation being maintained and press remarks from the Governor at the December meeting both suggest that the battle against inflation is not over. While dissent is likely to remain within the MPC, especially with the recent tell-tale signs that inflation is easing, we think a 25 bps hike is still likely in February,” said Rahul Bajoria, MD & Head of EM Asia Economics, Barclays.
“The minutes have highlighted the growing divergence in the views among the MPC members. We reiterate our view that the February MPC decision is likely to be a close call between a pause and 25 bps of a repo rate hike, with a bias towards the hike. We assign a reasonable probability to a shift in the stance towards neutral in the February policy,” said Kotak in its Economic research report.