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India’s central bank chief may be an eternal optimist, but the monetary policy committee (MPC) members were doused in frustration at the final meeting of their four-year tenure to vote on interest rates.

Minutes of the latest MPC meeting show the recent rise in retail inflation vexed members. Headline retail inflation has been above 6% in April, May and June, whereas the law mandates a flexible inflation target of 2-6%. Failure to keep inflation below 6% for two consecutive quarters would force the Reserve Bank of India (RBI) to give an explanation to the government and take immediate remedial measures.

This frustration was visible in deputy governor Michael Patra’s statement. “...Technical considerations under the monetary policy framework warrant a pre-occupation while dealing with the conditions of failure. All this, after a period of four years of uninterrupted success in keeping inflation well within the tolerance band... Consequently, monetary policy is forced into a standstill even when there is space available to persevere with its commitment to reinvigorate growth momentum and alleviate the effects of covid-19," he said.

Dangerous territory
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Dangerous territory

To be sure, members do not entirely believe the inflation prints of April and May, given the statistical limitations due to the lockdown. Be that as it may, the MPC knows it has to adhere to the mandate. All members indicated worry over the recent rise in inflation, more so on food inflation. The unanimous vote to keep policy rates unchanged was because of inflation. Indeed, despite the inflationary shock, the members were of the view that monetary policy should remain accommodative and grab every opportunity to respond to a recession.

So, are more rate cuts coming? It pays to focus on the statements of the members representing the central bank here. After all, the external members may change in the next meeting scheduled in end-September. The central bank officials, including governor Shaktikanta Das, showed evident worry over growth. Das highlighted the uncertainty rendered by the stubborn infection curve of the pandemic. Both Patra and executive director Mridul Saggar noted that food inflation needs to be closely watched. In fact, Patra termed food inflation as the “real core" instead of the common point that economists make of monetary policy being positioned as the best response to core inflation, which excludes food. “The generalized inflationary pressures across food and CPI excluding food and fuel, in a situation where growth is expected to contract, is a matter of serious concern," said Das.

Saggar said there could be a downward bias to growth outlooks and an upside pressure to inflation prints.

It is clear that RBI wants to be more accommodative, but cannot risk inflation getting out of hand.

While Patra’s comments indicate a rethink on the monetary policy framework, external member Chetan Ghate signed off with an advice: “Future MPCs should not go soft on inflation."

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