The RBI governor suggested waiting till effects of past interest rate cuts took effect
India’s retail inflation accelerated to 6.93% in July from 6.23% in June, remaining above the MPC’s target range of 2-6%
Concerns over persistently high inflation dominated discussions at the Reserve Bank of India’s (RBI) monetary policy committee (MPC) 4-6 August meeting that kept policy rates unchanged, minutes released on Thursday showed.
Committee members extensively discussed potential challenges from stubborn retail price inflation, which has stayed above the central bank’s tolerance band for nearly three quarters. The panel also discussed possible supply-side shocks from lockdown-related disruptions, before deciding to continue with the accommodative stance to nurture an economic recovery.
RBI governor Shaktikanta Das suggested giving it time for past interest rate cuts take effect. “I also feel that we should wait for some more time for the cumulative 250 basis points reduction in policy rate since February 2019 to seep into the financial system and further reduce interest rates and spreads. Given the uncertain inflation outlook, we have to remain watchful to see that the momentum in inflation does not get entrenched, which is also dependent on effective supply-side measures," Das said.
India’s retail inflation accelerated to 6.93% in July from 6.23% in June, remaining above the MPC’s target range of 2-6%, while food inflation rose to 9.62%. However, the central bank’s battle against inflation is complicated by the gloomy prospects on India’s gross domestic product, which is expected to contract 21.5% in the June quarter and 5.8% in FY21, according to RBI’s Survey of Professional Forecasters on Macroeconomic Indicators.
According to Michael Patra, MPC member and RBI deputy governor in charge of monetary policy, persistently high inflation will force the committee to take remedial action as per its mandate of keeping inflation between 2% and 6%. “If inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by mandate to undertake remedial action, including an immediate and more than proportionate response to head off the build-up of inflation pressures and prevent it from getting generalized," he said.
Mridul Saggar, the new MPC member who replaced Janak Raj, agreed that it was better to wait for more clarity on both inflation and growth outlooks.
“While markets and fundamentals seldom do a tango, a disconnect between the two carry the risks of disruptive market corrections. Policy needs to be mindful of the space that may be needed to deal with possibility of increased stress that may resurface later with loan defaults and recognition of bad loans," Saggar added.
Ravindra Dholakia, considered one of the more hawkish among MPC members, also expressed his concern around inflation. “Although the present circumstances are truly exceptional, the primary mandate given to MPC for inflation targeting at 4% with the upper tolerance limit of 6% has to be respected. In fact, the confusion and uncertainty created by the imputed CPI-C and implied inflation estimates needs to be cleared by more of regular readings on inflation rates," Dholakia said.