MPC minutes signal a clear shift that RBI now prioritises taming inflation

Almost all members of the monetary policy committee have expressed unanimous concern over surging inflation, even while risks to domestic growth warrant continued monetary policy accommodation, according to the minutes of its latest meeting.

Estimates point to inflation remaining above the upper tolerance band in the near-term even as growth projections have undergone downward revisions, said Reserve Bank of India (RBI) governor Shaktikanta Das.

Das said the current circumstances warrant prioritising inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability, while being mindful of the ongoing growth recovery.

The RBI, in a surprise move, had signaled that it’s heading toward exiting easy monetary policy. It caught the markets off guard in the latest monetary policy meeting by saying it now prioritizes tackling inflation over supporting economic growth, shifting gears after more than two years.

Shaktikanta Das and his colleagues signaled they will focus on withdrawing accommodative policies, while introducing a new 3.75% standing deposit facility rate to soak up excess cash from lenders.

India's retail inflation accelerated to a 17-month high of 6.95% in March, staying above the Central bank's tolerance band for third straight month, mainly due to sustained rise in food prices. Food inflation jumped to 7.68% in the reporting month.

Heightened geopolitical tensions due to the war in Ukraine have clouded the inflation outlook for central banks across the globe. Higher food and fuel prices have forced RBI to raise their inflation forecast to 5.7% from 4.5% for the current fiscal.

Meanwhile, RBI deputy governor Michael Patra said the high inflation levels in both developed and developing economies are testing societal tolerance levels.

He echoed the view that it will become more difficult to tame inflation the longer the fight is delayed.

"Supply disruptions, soaring commodity prices and ensuing financial market turbulence no more tell about fears of the shape of future inflation – the worst fears are already materialising," he added.

Another MPC member Mridul Saggar said recovering to pre-pandemic trend should not guide monetary policy at this stage and policy should focus on non-inflationary sustainable growth in the economy.

"A close watch on inflation expectations is necessary. If expectations are rising, especially if they turn unhinged and start rising faster than even actual inflation, monetary policy would have to reign in expectations to prevent a self-sustained inflationary spiral," he said.

"The narrative is very clear. Focus is on inflation and inflation containment. June policy will see both stance change to neutral and a repo rate hike," said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.

Nitsure expects a 25 bps hike if global crude oil prices stay around $100 a barrel but said more aggressive action would be warranted if oil prices shoot further up.