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The minutes of the Reserve Bank of India monetary policy committee’s June meeting were a predictable read. MPC members noted the improvement in both growth and inflation. At the same time, they were quick to point out that the RBI must not rest on the laurels of the cumulative 250 basis points policy rate hikes and drop its guard on price stability. The past rate hikes are working through the economy and that gives the central bank room to be in pause mode, but not enough to pivot.
Most economists termed the June policy as a Goldilocks one, where both inflation and growth showed a change for the better. The outlook for growth is more optimistic than before while that of inflation too is less daunting. But this perfect setting doesn’t look that perfect for the MPC members and unsurprisingly, the strongest comments are from the RBI members. The central bank’s Deputy Governor Michael Patra sees a potential turn in inflation should adverse factors such as El Nino, and supply-demand mismatches materialise. “Headline inflation is edging down towards the target, but it is still well above it and the balance of risks suggests that it will go up in coming months before coming down,” he said.
Governor Shaktikanta Das, too, is in the camp of holding guard against inflation until the 4 percent target is within sights. “Our fight against inflation is not yet over. We need to undertake forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if situation so warrants,” Das said. Rajiv Ranjan, executive director at the central bank, and members Shashanka Bhide and Ashima Goyal essentially mirrored the Governor's comments.
It appears that the RBI is unlikely to pivot towards rate cuts anytime soon. With the 4 percent target at the centre of the policy focus, a change in the stance too appears unlikely. Markets seem to have made peace with this as both bond yields and swaps have scaled back their expectations of rate cuts somewhat.
That brings us to the contrarian of the MPC, member Jayanth Varma. Varma has been a vociferous dissenter of the policy stance for a long time now. This time too, he believes that the stance is more vestigial than of any significance. To be sure, Varma sides with all members in maintaining a pause and is also in the camp of ‘inflation worriers’. In fact, he believes that the MPC is congratulating itself a little prematurely on inflation.
At the same time, Varma has flagged that the repo rate is high enough to bring inflation to the middle of the mandated 2-6 percent band. He also goes on to say that “monetary policy is dangerously close to levels at which it can inflict significant damage to the economy”. In this context, he says, the stance of withdrawal of accommodation is completely disconnected from reality.
Only time will reveal whether Varma is ahead of the curve in foreseeing policy damage on demand. The weak private consumption growth in the fourth quarter of FY23 perhaps is evidence of the policy rate onslaught. Sacrifice of growth is inevitable in the process of bringing down inflation. As this piece from the Financial Times (free for Moneycontrol Pro subscribers) notes, a recession is the price the US economy will pay in the Federal Reserve’s efforts to bring inflation down to its 2 percent mandate.
How much pain can the Indian economy take to get to 4 percent inflation?
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