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The majority of the Reserve Bank of India’s monetary policy committee members were in favour of front-loading rate increases to bring inflation within the 2-6% target range and reduce the need for aggressive rate hikes in future, minutes of its August policy meeting released on Friday showed.

Governor Shaktikanta Das said, “actions are tailored towards first bringing inflation within the target band and then taking it close to the target of 4% over the medium term while supporting growth. Actions will be calibrated, measured and nimble, depending on the need."

On 5 August, RBI increased the repo rate by 50 basis points to 5.4%, with the monetary policy stance remaining focused on withdrawal of accommodation.

According to MPC member Jayant Varma, the resolution of the monetary policy committee should be interpreted as a high likelihood of further front-loaded tightening.

Varma, the lone member in the panel to have voted against retaining the stance, argued that ‘withdrawal of accommodation’ should “simply" be dropped as it means that the committee is focused on taking the repo rate back to 6.5%.

“Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation" cannot refer to withdrawal of the pandemic-era accommodation. It can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in February 2019. A plain reading of this resolution would then be that MPC is focused on taking the repo rate back to 6.50%. In my view, such an indication of a terminal repo rate of 6.50% is totally unwarranted in the situation that we are in," Varma said. “The resolution should, in my view, be interpreted only as stating that there is a high likelihood of further front-loaded tightening without restricting the freedom of MPC to respond to the changing environment in a data-driven manner," he added.

MPC member and RBI deputy governor Michael Patra said the inflation target might be breached for a prolonged period if monetary policy overlooks the second-round effects of supply shocks through the exchange rate, expectations, etc. He, therefore, argued that front-loading rate actions would demonstrate RBI’s commitment to the inflation target of 4%.

“Front-loading of monetary policy actions can keep inflation expectations firmly anchored, re-align inflation with the target and reduce the medium-term growth sacrifice as it is timed into the recovery underway. Small steps over a prolonged period could allow inflation to get entrenched and inflation expectations unhinged," Patra said. “By front-loading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target."

Rajiv Ranjan, an MPC member and executive director at RBI, said front-loading rate hikes would strengthen monetary policy credibility. “This would require monetary policy to persevere with its exit from accommodation to ensure that front-loaded policy rate hikes dampen inflation expectations, anchor second-round effects and firmly establish our commitment to price stability," Ranjan added.

Economist Ashima Goyal, who is also on the rate-setting panel, said a flexible inflation-targeting framework is needed to respond to inflation and growth.

“The repo rate does not respond to the exchange rate. This is market-determined, with India’s capital flow and reserve management effectively reducing exchange rate volatility, which can be too high in emerging markets under global shocks. Research shows that inflation targeting works better in developing economies if additional instruments are available to address excess exchange rate and capital flow volatility. India has many such instruments that can be activated if necessary," Goyal added

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