High inflation weighed on MPC members as RBI raised rate: Minutes

All the six members of the MPC, including the RBI Governor, expressed concern over continued high inflation and stressed that the cental bank's endeavour would be to bring down price rise within the target range, as per minutes of the latest Monetary Policy Committee (MPC) meeting released on Wednesday.

The Reserve Bank's rate-setting panel, which met during June 6-8, raised the key interest rate by 50 basis points—the second hike within five weeks. In early May, the policy repo rate was hiked by 40 basis points.

As per the minutes, RBI Governor Shaktikanta Das said while high inflation continues to be the major concern, revival of economic activity remains steady and is gaining traction. The time is appropriate to go for a further increase in the policy rate to effectively deal with inflation and inflation expectations.

"Accordingly, I vote for a 50 bps increase in the repo rate which would be in line with the evolving inflation-growth dynamics and will help in mitigating the second round effects of adverse supply shocks," he said.

The rate hike, he added, will reinforce the RBI's commitment to price stability -- its primary mandate and a pre-requisite for sustainable growth over the medium term.

Besides raising the repo rate to 4.9 per cent, the Reserve Bank also revised upwards its inflation forecast for the current fiscal to 6.7 per cent from its earlier estimate of 5.7 per cent.

MPC member and RBI Deputy Governor Michael Debabrata Patra said the global inflation crisis is just the face of one of the most severe food and energy crises in recent history that now threatens the most vulnerable across the globe.

With inflation majorly being driven by supply constraints amid the ongoing Russia-Ukraine war, Patra said to gain time for supply to respond, the blunt instrument of monetary policy has to be deployed, and there is no other recourse at this juncture.

He said if inflation is allowed to go out of hand, it could corrode the foundations of the recovery that is gaining traction, and deter investment decisions.

"The battle would be lost but the war would have been won if India is able to bend down the future trajectory of inflation,' he said, and exuded confidence retail inflation would fall back to below 6 per cent by the fourth quarter of the fiscal.

Rajiv Ranjan, RBI Executive Director and MPC member, said with protracted geopolitical tensions and no early resolution of the conflict in sight, considerable uncertainty clouds the evolving inflation trajectory.

"While the supply side measures taken by the government would undeniably alleviate some cost-push pressures, it needs to be complemented by calibrated monetary policy actions to anchor inflation expectations and contain the broadening price pressures," he said, as he too voted for increasing the repo rate by 50 basis points.

He also stressed that it may be important for the government—both Centre and States—to successfully complete their budgeted capex plans and work through their counter-cyclical policy levers to ensure a soft-landing for the economy amid monetary tightening to rein in inflation.

The MPC comprises the RBI Governor, two central bank officials, and three independent members nominated by the government.

Independent member Shashanka Bhide said the inflationary pressures that have intensified since March 2022 are expected to remain a concern in FY2022-23 unless the international supply conditions improve quickly, as per the minutes.

"Changing the course of inflation trajectory to reach targeted level is a priority at this stage for monetary policy although the growth momentum remains modest one," he noted.

While voting for raising the repo rate to 4.9 per cent, MPC member Ashima Goyal said further changes will depend on growth and inflation outcomes.

"Since future moves will either be a pause or a rise it is also useful to change the guidance to withdrawal of accommodation," she said.

She was in favour of remaining focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Jayanth R Varma, who had called for a 100 basis points rate increase to be carried out very soon in the May MPC meeting, said his preference would have been for an increase of 60 basis points.

"However, I have decided to go along with the majority view of 50 basis points for the same reason as in May: a difference of opinion of 10 basis points is not material enough to be elevated to a dissent," he said.

He further said many leading central banks currently provide forecasts of the future path of the policy rate several quarters ahead.

"The MPC has now accumulated several years of experience, and the RBI has evolved into a mature inflation targeting central bank. I believe that the time is therefore ripe for MPC members to start moving towards providing projections of the future path of the policy rate," Varma said.

This, he opined, would help stabilise long-term bond markets and also anchor inflation expectations.

The RBI Governor had also said the repo rate is still below the pre-pandemic level and the liquidity surplus is still higher than what it was prior to the pandemic.

"As our policy in recent months has been unambiguously focussed on withdrawal of accommodation, both in terms of liquidity and rates, the change in wording of stance should be seen as a continuation and fine-tuning of our recent approach," Das said.

The withdrawal of accommodation would be non-disruptive to the process of recovery and would strengthen the ongoing efforts to combat inflation and anchor inflation expectations, he added.

The next meeting of the MPC is scheduled to be held from August 2-4, 2022.

According to the Reserve Bank of India Act, 1934, the central bank shall publish minutes of the MPC proceedings on the 14th day after every meeting. PTI NKD CS NKD ABM ABM