Five out of six members of the monetary policy committee (MPC) were concerned about an increase in inflation, and one even suggested a 25 basis point increase in the repurchase, or repo, rate, according to the minutes of the panel’s last meeting, released on Thursday.
“I believe that a preemptive 25 basis points increase in the policy rate now will point us better at the target of 4% to which the committee has committed explicitly,” wrote Reserve Bank of India (RBI) executive director Michael Patra. “It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched.”
One basis point is one-hundredth of a percentage point.
Patra eventually decided to vote in favour of holding the repo rate— at which RBI infuses liquidity into the banking system—unchanged at 6.25% and wait for more data.
At its 6 April meeting, the MPC raised the reverse repo rate—at which RBI drains liquidity from the system—to 6% from 5.75%.
In the previous meeting, the panel had shifted the monetary policy stance from “accommodative” to “neutral.”
Also read | Full text of RBI’s monetary policy minutes
Only one MPC member, Ravindra Dholakia of the Indian Institute of Management, Ahmedabad, said he expected inflation to decline over the next year. Other members noted the sticky nature of inflation.
“The shift to neutral was already an indicator of the hardened stance of the RBI. On deeper thought, suggestions of a needed hike in the policy rate in the MPC minutes should not be a surprise,” said Saugata Bhattacharya, senior vice-president and chief economist, Axis Bank Ltd. “The possibility of rising prices and an unanchoring of inflation expectations, as indicated by the household surveys, is likely to worry a central bank.”
In March, consumer price inflation rose to 3.81% from 3.65% the previous month.
“There has also been an inching up in the median 3-month and 1- year-ahead inflationary expectations. The recent decline in headline inflation has been driven completely by food inflation and is likely to reverse in the summer months,” Chetan Ghate, a professor at the Indian Statistical Institute and one of the three external members of the MPC, said.
According to Ghate, the house rent allowance (HRA) increase prescribed by the 7th Pay Commission posed a potential inflation risk.
“Our focus on meeting the medium-term inflation target should remain laser sharp in light of such risks,” Ghate said.
RBI governor Urjit Patel stressed the need to keep a close watch on the way inflation is progressing and highlighted its volatility.
“Notwithstanding likely favourable base-effects in the next few months, the outlook for inflation calls for close vigilance with a view to ensuring that the medium-term inflation trajectory evolves in line with the objective of bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner,” Patel said, according to the minutes.
RBI deputy governor Viral Acharya noted the uncertainty as to when headline inflation may cross the target rate of 4%. He maintained that the risks on inflation were evenly balanced out.
Acharya also pointed to other major issues which the central bank should concern itself with, including tackling the stressed asset problem in the banking sector, deepening of the corporate bond market, improving financial hedging options and mopping up surplus liquidity in a more durable manner. India’s banking system is struggling with Rs7 trillion toxic assets.
“It seems an opportune time to focus on these issues,” Acharya said.