With the price situation remaining at “unacceptably and uncomfortably” high level, members of the RBI’s Monetary Policy Committee underlined the need for preventing upward drift of inflation and bringing it down to the target band, as per minutes of its recent policy meeting.
Reserve Bank Governor Shaktikanta Das said the policy actions of the central bank “would continue to be calibrated, measured and nimble depending upon the unfolding dynamics of inflation and economic activity.” Das, according to the minutes of the MPC meeting released on Friday, said retail inflation was “unacceptably and uncomfortably” high, as he along with other members proposed a 50 basis points hike in repo rate at the last policy review with a view to preventing its upward drift from the target.
The MPC at its meeting from August 3 to 5 had decided to increase the benchmark lending rate by 50 basis points to 5.40 per cent. The sequence of policy measures, Das said, “is expected to strengthen monetary policy credibility and anchor inflation expectations. Our actions would continue to be calibrated, measured and nimble depending upon the unfolding dynamics of inflation and economic activity.”
Frontloading of monetary policy actions, opined RBI Deputy Governor Michael Debabrata Patra, “can keep inflation expectations firmly anchored, re-align inflation with the target and reduce the medium-term growth sacrifice as it is timed into the recovery underway.” MPC has been tasked by the government to ensure that Consumer Price Index (CPI) based inflation remains at 4 per cent with a margin of 2 per cent on either side. The CPI inflation was at 7.01 per cent in June and eased to 6.71 per cent in July. The data for August is scheduled to be released by the National Statistical Office (NSO) on September 12.
Governor Das further said the RBI’s measures are tailored towards first bringing the CPI inflation within the target band and then taking it close to the target of 4 per cent over the medium term, while supporting growth. “We will continue with ‘whatever it takes’ approach, given the new set of challenges and very high uncertainties that we are confronted with,” he added.
Patra also stressed that at the current juncture, shocks are large and recurring. Combined with the rebound in spending liberated from the pandemic, they carry the risk of un-anchoring inflation expectations, he opined. On exchange rate, he said the elephant in the room is the unrelenting strength of the US dollar, which has risen by over 8.3 per cent since March 31, 2022.
The Deputy Governor noted that during the financial year 2022-23 (up to August 3), the Indian rupee has fallen by 3.9 per cent against the US dollar — 4.4 percentage points less than the MSCI advanced economy currency index and 1.3 percentage points less than the MSCI EME currency index (5.1 per cent). RBI Executive Director and MPC member Rajiv Ranjan said the risks to the global economy which were initially perceived as stagflationary are now increasingly surfacing to be that of an outright recession for most economies. This has fuelled a debate of hard versus soft landing for the global economy.
The MPC comprises three officials from the RBI and three nominated by the central government. The government-appointed members on the panel are — Shashanka Bhide, Ashima Goyal and Jayanth R Varma.
Bhide, as per the minutes, opined that the global economic conditions have turned unfavourable for growth from the combined shocks of the breakout of the Russia- Ukraine war, continued shadow of Covid-19 across countries and the tightening of monetary policies to rein in inflation in many countries.
“The worsening global economic conditions have come at a time for us when the domestic economy was beginning to sustain its growth momentum after regaining the output level in 2021-22 from the shocks of the Covid-19 pandemic,” he said, while voting for a 50 basis points hike in repo rate. He is Honorary Senior Advisor, National Council of Applied Economic Research, Delhi.
MPC member and Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, Ashima Goyal said one of the first impacts of rising policy repo rates should be on credit demand as pass through raises loan rates. India is just coming out of a deleveraging cycle and recovery requires credit growth to rise. “Despite rising repo rates in May and June 2022, yearly credit growth over the respective months in 2021 continues to be high partly due to the base effect,” she pointed out.
Goyal said preliminary sectoral credit data shows sharp rise in bank loans to the service sector but average of MSME, NBFC and personal bank loans over May and June was less than in April, and loans to large industry fell in June. “There are pitfalls in monthly comparisons and the picture will be clearer as more data comes in. The rise in loan rates is still limited but has begun,” the member said.
Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad) said the logic of front-loading argues in favour of a 75 basis point hike. This would establish the credibility of monetary policy beyond doubt, help achieve a faster reduction in the inflation rate, and hopefully reduce the terminal repo rate consistent with bringing inflation close to the target, he said.
“Weighing against that is the fact that a 75 basis point rate hike is quite unusual. In the context of market expectations of a 35-50 basis point hike, such a large hike risks being misinterpreted as a sign of panic, and could be unnecessarily disruptive,” he added. He too voted in favour of increasing the policy repo rate by 50 basis points.
The 37th meeting of the MPC, constituted under the Reserve Bank of India Act, 1934, was held during August 3 to 5, 2022. According to Section 45ZL of the Reserve Bank of India Act, 1934, the RBI shall publish, on the fourteenth day after every meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting. The next meeting of the MPC is scheduled during September 28-30, 2022.
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