rbi mpc minutes: Here’s why MPC minutes suggest RBI won’t jump the gun on normalisation

NEW DELHI – As expected, the minutes of the Monetary Policy Committee’s April 6-8 meeting showed a significant degree of concern from members of India’s rate-setting panel regarding upside risks to inflation.

The risks indeed are substantial. With global crude oil prices rising around 30 per cent from February to March because of supply disruptions caused by the Ukraine war, India, which is heavily dependent on fuel imports, faces substantial inflationary pressure.

In the statement he read out, on April 8, Reserve Bank of India Governor Shaktikanta Das acknowledged these risks by announcing a sharp increase in inflation forecasts and saying that while the stance of monetary policy would remain accommodative, the MPC would focus on withdrawal of accommodation.

Inflation data released after the April 8 statement showing consumer prices at a 17-month high and speculation is now rife that the rate-setting committee could start the process of raising the benchmark policy repo rate as early as June instead of first shifting the stance to neutral and then lifting rates in August.

BE NIMBLE, BE NUANCED

The MPC minutes reflect the urgency to rein in consumer prices, but there are some hints that the rate-setters at Mint Street are not considering going all guns blazing when it comes to raising interest rates.

Consider the following statement by Das, who, as RBI Governor, holds the casting vote if the MPC votes were to be tied.

“There is also a risk that the ongoing recovery, which is already strained by the current crisis, may get undermined if there is rapid tightening of financial conditions. In these circumstances, policy making has to be nuanced and nimble.”

A degree of reset to a higher interest rate regime has already started in the economy – yields on government securities have shot up more than 70 basis points in 2022, while the country’s largest lender State Bank of India, last week raised lending rates.

Essentially, the cost of borrowing has started to rise, implying tighter financial conditions in the economy.

In this backdrop, Das’ warning of “rapid tightening of financial conditions” derailing the ongoing economic recovery assume significance.

In a similar vein, MPC member Michael Patra, the Deputy Governor in charge of monetary policy, argued that supply disruptions, soaring commodity prices and ensuing financial market turbulence no more tell about fears of the shape of future inflation but instead darken the outlook for growth.

External member Ashima Goyal said: “Research and Indian experience in the 2000s shows an early and gradual rise works better… Exit should be balanced, avoiding the over-stimulus after the global financial crisis and the consequent over-tightening in the 2010s.”

Perhaps the strongest takeaway from the minutes came from Patra’s portion. The Deputy Governor highlighted the potential outcomes ahead for central banks – achieving perfect disinflation (a soft landing) or overshooting the runway and bringing about a recession in the quest to tame inflation.

“The dilemma is even sharper for central banks with dual mandates – will their remits allow them to kill the economy for price stability?”

At a time when growth is still struggling to regain its footing from the unprecedented damage wreaked by the pandemic, it would be reasonable to say that the RBI is unlikely to cast a death blow to the recovery.

The central bank is widely expected to raise interest rates but judging by the views expressed in the minutes, the rate hikes will not of a magnitude that would choke off demand in the economy.