MPC Minutes: Premature pause in rate hikes a costly error at this juncture, says RBI Governor

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The Reserve Bank of India (RBI) Governor Shaktikanta Das is of the opinion that a premature pause in the monetary policy rate hike course would prove to be a costly policy error at this juncture, showed the minutes of the Monetary policy committee (MPC) meeting held between December 5 to December 7.

“I am of the view that a premature pause in monetary policy action would be a costly policy error at this juncture,” Das said.

Given the uncertain outlook, Das added that we might find ourselves striving to do a catch-up through more vital policy actions in the subsequent meetings to ward off accentuated inflationary pressures.

The MPC hiked the repo rate by 35 bps in the meeting taking the policy repo rate to 6.25 percent to fight persistently high inflation. The central bank publishes the minutes of the monetary policy on the fourteenth day after every monetary policy meeting.

Das voted for an increase of 35 bps in the repo rate – a departure from 50 bps on three previous occasions – which itself conveys the signal of an improvement in the inflation outlook.

In December monetary policy, Shashanka Bhide, Ashima Goyal, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das voted to increase the policy repo rate by 35 basis points. However, Jayanth R. Varma voted against the repo rate hike.

Shashanka Bhide, Rajiv Ranjan, Michael Patra and Shaktikanta Das voted to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. While others voted against this part of the resolution.

"Our successive rate actions since May 2022 are working through the system," Das said.

He said further calibrated monetary policy action is warranted to contain build-up in underlying inflationary pressures, keep inflation expectations anchored, and bring inflation closer to the target rate of 4 percent over the medium term.

Inflation is expected to decline in H1:2023-24 but would still be well above the target.

The governor said uncertainties surrounding the inflation trajectory remain sizeable, given the geopolitical tensions, global financial market volatility, pending pass-through of input costs to domestic output prices and weather-related disruptions.

"Core inflation (CPI excluding food and fuel) is exhibiting persistence around 6 percent for the past few months. Hence, there is no room for complacency and the battle against inflation is not over. This necessitates a constant vigil on prices," Das said.

Headline retail inflation rate slumped to an 11-month low of 5.88 percent in November from 6.77 percent in October.

The fall in inflation in November follows a similar drop in October, allowing it to fall below the 6 percent upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance band for the first time in 2022.

As for the medium-term target of 4 percent, CPI inflation has exceeded it for 38 months in a row.

"It would be prudent to keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary," Das said in the RBI Minutes.