MPC Minutes: War against inflation not yet won, premature to declare end to tightening cycle, says Jayanth Varma

In the current situation of high inflation, monetary policy does not have the luxury of responding to these growth headwinds, Varma said.

“In fact, it is almost axiomatic that monetary action can cool inflation only by suppressing demand. However, policy makers must be vigilant against overshooting the terminal policy rate, and thereby slowing the economy to a greater extent than what is needed to glide inflation to the target,” Varma added.

Also read: MPC Minutes: Fight against inflation is far from over, says RBI governor

With respect to the monetary policy stance, Varma said he failed to comprehend its meaning.

“My colleagues in the MPC assure me that the language is crystal clear to market participants and others. It may well be that I am the only person who finds it hard to understand,” Varma said.

Explaining further, Varma said  he was unable to reconcile the language of the stance with the simple fact that no further “withdrawal of accommodation” remains to be done since the repo rate has already been raised to the 6.50% level prevailing at the beginning of the previous easing cycle in February 2019.

“It is of course possible to undertake further tightening, but that would not constitute a “withdrawal of accommodation” by any stretch of the imagination,” Varma said.

Ashima Goyal, another MPC member, too argued that due to erratic weather and continuing global uncertainties among other reasons, this may not be the end of the rate hikes.

Goyal, in her  comments in MPC minutes, stated that there is no logic for overshooting policy rates and then cutting in a country such as India where the largest impact of the interest rate is on growth.

"Because of erratic weather and continuing global uncertainties, and until it is clear that inflation is well on the path to reaching the target, it is necessary to emphasize that this may not be the end of the rate hikes," said Goyal.

Shashanka Bhide, another member of the MPC, in his statement said that it is important to assess the extent of the impact of monetary policy actions on inflation rate, besides the other developments.

"I believe that a pause in the policy rates is appropriate in this meeting, without any commitments on the subsequent actions except that aligning
the inflation rate with the target will remain a policy priority," said Bhide.

Rajiv Ranjan, another member of the MPC, highlighted that this is a ‘wait and watch’ pause. "Though inflation at present remains above the comfort zone, there are reasons for optimism going forward. It is neither a ‘premature’ pause nor a ‘permanent’ one.

Deputy Governor Michael Patra, in his MPC statement stated that the future path of inflation is vulnerable to several supply shocks.

"The MPC must accordingly remain on high alert and ready to act pre emptively if risks intensify to both sides of its commitment: price stability and growth," said Patra.

RBI Governor Shaktikanta Das said the central bank’s fight against inflation is far from over and the efforts will continue to bring inflation closer to the medium-term target.

“Our fight against inflation is far from over and we have to continue with our efforts to bring down inflation closer to the target over the medium term,” Das said in the RBI April minutes.

Further, he said that the projected inflation in Q4 2023-24 at 5.2 percent would still be well above the target. "Therefore, at this juncture, we have to persevere with our focus on bringing about a durable moderation in inflation and at the same time give ourselves some time to monitor the impact of our past actions," he noted.