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Rising inflationary concerns dominated MPC’s latest off-cycle meeting, minutes show

The MPC, in a surprise move on May 4, had hiked the repo rate by 40 basis points to 4.40 percent and increased the cash reserve ratio by 50 basis points amid concerns over high inflation.

May 18, 2022 / 05:51 PM IST

The majority of the members of India’s Monetary Policy Committee highlighted the concerns of a sharply rising inflation trajectory in the latest round of monetary policy meeting, according to the minutes of the panel’s latest off-cycle meeting released on May 18.

“We should keep our focus on withdrawal of accommodation to ensure that inflation remains within the target, while supporting growth,” Shaktikanta Das, Reserve Bank of India (RBI) Governor and head of the six-member MPC, said in the minutes.

The incoming data and information would be constantly monitored to reassess the outlook and take necessary measures, Das said. The MPC will remain "equally resolute and committed" to bringing back inflation closer to the target through all possible instruments at its disposal, he said.

The MPC, in a surprise move on May 4, hiked the repo rate by 40 basis points to 4.40 percent and increased the Cash Reserve Ratio (CRR) by 50 basis points on concerns over high inflation. A 100 basis point is equal to one percentage point.

The rate-setting body, which had kept the policy rates unchanged since May 2019, had shifted its priorities to put a lid on price pressures and tame inflation. In the RBI’s latest monthly bulletin, released on May 17, the central bank emphasised the need to ensure low and stable inflation to spur growth in the economy.

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Retail inflation in India is not showing signs of abating as global commodity prices have shot up due to the escalating tension between Russia and Ukraine.

Data showed headline retail inflation surged to 7.79 percent in April, the highest since May 2014. April’s print was 84 basis points higher than the March number of 6.95 percent and stayed above the central bank’s tolerance ceiling for a fourth straight month.

Under the current regime, the RBI targets inflation at 4 percent with a tolerance ceiling of two percentage points on either side. In the April policy, the RBI had raised its inflation forecast for the current financial year to 5.7 percent, higher than its estimate of 4.5 percent in February. It also cut India’s economic growth forecast to 7.2 percent for this financial year from 7.8 percent earlier amid rising geopolitical risks between Russia and Ukraine.

In the minutes released today, external member Jayanth Varma said that since April, inflation risks have become “more pronounced both in terms of magnitude and in terms of persistence.” On the other hand, the growth shock appears to be less severe than initially feared, Varma said,

“It appears to me that more than 100 basis points of rate increases need to be carried out very soon, Varma said. “The majority of the MPC is in favour of 40 basis points for reasons which are not very clear to me. Whatever symbolic or psychological benefit there may be from keeping the hike below 50 basis points is outweighed by the simplicity and clarity of moving in round multiples of 25 basis points.”

Further, it would not be wise for the MPC to persist with language that is “pedantically correct,” but falls short in communicative efficacy, Varma wrote in the minutes. Such rephrasing is a matter for a future meeting, he added.

Michael Patra, a deputy Governor and internal member of the MPC, said that the approach of reversing the extraordinary accommodation in terms of policy rate and liquidity was “the right approach,” given persistently high inflation.

“When it is done, we will have reached a stage of neutral accommodation – in contrast to extraordinary pandemic time accommodation – from where the next stage responses can be calibrated,” Patra added.

External member Ashima Goyal said that in view of a reasonable recovery and the sharp rise in inflation, which will also raise inflation projections, frontloading of rate hikes is required to prevent the real rate from becoming too negative.

A credible demonstration of commitment to inflation targeting, that brings down inflation expectations to the tolerance band, together with open market operations, should reduce the excessive yield spread, Goyal said in the minutes.

Newly appointed member Rajiv Ranjan said that the 40 bps rate hike was “neither too small nor too excessive,” and was appropriate at this juncture to address inflationary concerns. If monetary policy decides to see through these shocks, and especially if they are not transitory, inflation expectations could become “unanchored,” leading to a persistent upward drift that may not revert to the pre-shock level even after the initial shock completely dissipates, Ranjan added.

Another member Shashank Bhide also said that given the present assessment of the inflation and economic growth conditions, monetary policy measures to break the inflation dynamics have become necessary.

“While the impact of such monetary policy measures may affect growth momentum adversely in the short-term, the overall external conditions also require that domestic inflation pressures are contained quickly,” Bhide added.
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