RBI MPC minutes: MPC members say addressing inflation risks crucial: Minutes

Almost all members of India’s monetary policy committee argued in favour of action to curb inflationary pressures at their April 6-8 meeting despite continuing risks to economic growth, minutes released on Friday showed.

Although it chose to keep its key lending rate at a record low, the Reserve Bank of India said after the meeting that it would shift away from its ultra-loose monetary policy stance to focus on inflation, which has surged due to the Ukraine war.

In a surprise move, the central bank restored its liquidity adjustment facility corridor to pre-COVID-19 levels, which was seen as a first step in moving away from pandemic emergency measures.

“Circumstances warrant prioritising inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability, while being mindful of the ongoing growth recovery,” Governor Shaktikanta Das wrote in the minutes.

Michael Patra, deputy governor at RBI believes that the worst fears on inflation were materializing. “The view that increasingly occupies center-stage is that irrespective of whether supply bottlenecks are the driver or pent-up demand, it will become more difficult to tame inflation the longer the fight is delayed,” Patra said.

The MPC voted unanimously to retain its accommodative monetary policy stance and added that it would shift focus to withdrawal of accommodation going ahead.

Several market participants and economists now expect the MPC to change its stance to ‘neutral’ in June and start raising the repo rate in August – and potentially even in June – if inflation continues to surprise on the upside.

India’s retail inflation accelerated to near 7% year-on-year in March, its highest in 17 months and above the upper limit of the central bank’s tolerance band for a third straight month.

“The policy will still stay accommodative as rates, even after lifting nominal rates, will stay below real neutral rate for foreseeable future,” RBI executive director and MPC member Mridul Saggar said at the meeting, according to the minutes.

Future policy actions will either be a pause or raising of rates, said MPC member Ashima Goyal.

“Rebalancing of liquidity started in 2021, and has now reached a level, with new facilities to absorb liquidity, that is compatible with raising policy rates. Short rates are set to rise to make the repo rate the operational policy rate again,” she added.

As long as rates remain below the neutral rate, it is still not a tightening regime, Goyal said.

Here are some excerpts

• Shashanka Bhide, an external member in the panel, said sharp changes in the global economic environment that have now unfolded require a reconsideration of the economic outlook and policy response.
• Jayanth Rama Varma, an external member in the panel and the lone dissenter on the policy stance for the last several meetings, said any forward guidance would tie the MPC’s hands on future action.
• “It is necessary to communicate clearly that in future meetings, the MPC would consider itself completely free to take any action on the policy rates that may be warranted by the data that becomes available in the coming week,” he said.
• Mridul Saggar, an executive director at RBI, said the right usage of varied tools should bring back inflation closer to the target later without much growth sacrifice.

with agency inputs