MPC opposed to a hasty pause in war on inflation

Members of the Reserve Bank of India’s monetary policy committee (MPC) agreed to raise the repo rate by 25 basis points in February as it felt a pause would be premature in its fight against runaway prices, showed minutes of the meeting published on Wednesday.

Inflation measured by the consumer price index (CPI) has moderated primarily due to lower vegetable prices, governor Shaktikanta Das said, adding that core inflation—CPI excluding food and fuel—is, however, elevated and sticky at around 6%.

“We must, therefore, remain unwavering in our commitment to bring down inflation to ensure a decisive and durable moderation in inflation towards the target of 4% over the medium term while being mindful of growth,” Das said.

Therefore, further calibrated monetary policy action is necessary in the February meeting to keep inflation expectations anchored and break the persistence of core inflation, Das said. He justified his call for a 25-bps hike by saying that tapering the pace of the rate hike would allow time for past policy actions to show results and also because it would be too early to pause, “lest we are caught off-guard and need to do a catching-up later”.

Days after RBI’s February policy meeting, retail inflation accelerated to 6.52% for January, breaching the upper bound of RBI’s 2-6% target. After staying above 6% for 10 months from January to October last year, it slid to 5.88% in November and to 5.72% in December.

According to deputy governor Michael Patra, although inflation seems to have peaked, it remains high and is the biggest threat to the macroeconomic outlook.

“Restoration of price stability— as statutorily mandated—will provide a solid foundation for a growth trajectory that actualizes India’s potential,” he said.

“Taking into account the height of inflation, current and projected monetary and financial conditions still reflect some slack, although they are moving into tighter territory with the follow-through of recent monetary policy actions,” Patra said.

“While keeping in mind the objective of growth, the foot must remain on the brake as we chart our future trajectory. On a pragmatic basis, it is important to at least contain inflation within the tolerance band in 2023-24 as the first milestone to be passed in aligning inflation with the target,” he said.

RBI executive director Rajiv Ranjan said that although inflation is projected to moderate to 5.3% in 2023-24, its quarterly path indicates considerable variation due to the large influence of base effects.

“There does exist considerable uncertainty to this baseline trajectory. A likely bumper rabi harvest could bring about a softening of food inflation; however, there could be risks emanating from adverse weather events,” Ranjan said.

He said it would be hasty to ease the vigil against inflation, and an overly large focus on the recent fall in inflation led by “intermittent inflation” may tempt an untimely pause in monetary policy action, a costly policy error. The continuously high core inflation, he said, points to the persistence in “steady inflation”, which warrants caution.

Meanwhile, Jayanth Varma said that monetary policy was complacent about inflation in the second half of 2021-22 and is paying the price for that. In the second half of 2022-23, monetary policy has, Varma said, become complacent about growth.

“I believe that the 25-bps rate hike approved by the majority of the MPC is not warranted in the current context of diminished inflationary expectations and heightened growth concerns,” said Varma.

While MPC members Shashanka Bhide, Rajiv Ranjan, Michael Patra and governor Das voted to increase the policy repo rate by 25 bps, Ashima Goyal and Jayanth Varma voted against the repo rate hike.

That apart, all four members except Goyal and Varma voted to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target while supporting growth.