MPC minutes: Members unwilling to let guard down on high inflation, yet watchful on growth

Many members of the Monetary Policy Committee (MPC) highlighted the continuing concerns about high inflation while some cautioned about the impact of too much rate tightening on growth, according to the minutes of the meeting released on February 22.

"Although it seems to have peaked, inflation remains high and, in my view, it 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 actualises India’s potential," said RBI deputy governor Michael D Patra in RBI February minutes.

"Excessive front-loading of rate hikes carries the risk of over-shooting that is best avoided for compelling reasons in the Indian context," said Ashima Goyal, RBI MPC Member.

She added that firstly, raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation. Secondly, since there are more lags in monetary transmission in India, over-shooting can have persistent deleterious effects here, including instability.

Thirdly, macroeconomic stability improves most rapidly if real interest rates are kept smoothly below growth rates to counter external shocks. The Indian economy is well-poised to achieve this combination and to reduce its chronic underemployment.

In the February monetary policy, the central bank increased the repo rate by 25 basis points to 6.50 percent to fight against persistent higher inflation. This was the sixth straight hike by the central bank in the last 10 months.

With this hike, the RBI cumulatively increased the repo rate by 250 basis points since May 2022.

The RBI Governor Shaktikanta Das in the MPC Minutes said Monetary policy is thus expected to remain in a tightening mode, but there is uncertainty about its trajectory.

India’s headline retail inflation remained a concern for the RBI, which is increasing the repo rate to cool the prices.

But, January’s inflation print again breached the central bank’s upper tolerance after remaining lower for consecutive months, making RBI more cautious. This has increased the expectations of further rate hikes.

India’s headline retail inflation rate rose in January to 6.52 percent after falling for two consecutive months.

In the February monetary policy, the RBI lowered its inflation forecast for the current financial year by 20 basis points to 6.5 percent, with inflation seen averaging 5.7 percent in January-March.

Meanwhile, core inflation also remained sticky in the last few months as the RBI always mentioned.

Similarly, in February monetary policy, RBI Governor Shaktikanta Das cautioned that ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels.

While Michael Patra, during the policy press conference in February said that the RBI expects its rate actions to modulate demand and modulate core as they are passed into the economy. "And in fact, if you see our projections, embedded in the headline is a core project tree, which is going to be slightly lower than what it was in 2022-23. It will be sticky, but slightly lower," he added.