The majority of members of the Monetary Policy Committee (MPC) emphasized the increasing risk of continuous high inflation in the last round of the monetary policy meeting, according to the minutes of the meeting released on April 22.
“The current geopolitical situation has caused the upward revision of our inflation projection for 2022-23. The estimation now refers to the remaining inflation on the top tolerance ribbon in the near term even because the growth projection has experienced a downward revision,” Reserve Governor of Bank of India and the head of the monetary policy committee of six Shaktikanta Das members, said in the minutes of the latest panel meeting. “This is an indication of the amount of adverse exogenous supply and price shocks.”
While the risk of domestic growth calls for sustainable accommodative monetary policy, inflationary pressure requires monetary policy actions, said the watershed in the minutes.
The situation guarantees prioritizing inflation and detaching inflation expectations in the order of the objectives to maintain macro and financial economic stability, while paying attention to the ongoing growth recovery, the governor added.
Michael Patra, a deputy governor of RBI, said that as a projection showed, if inflation continued in high-range, liquidity drainage had been reached and planned for the coming year would reduce the risk of excess liquidity and pose a threat to financial stability.
In the latest policy on April 8, MPC has held a stable benchmark repo tariff for eleven consecutive time at a record low of 4 percent but narrows the policy corridor by introducing what is called a deposit facility with a rate of 3.75 percent. MPC has signaled that it is now shifting to a ‘less accommodating’ attitude in the background of increased inflation risk.
Inflation of Indian Consumer Prices (CPI) rose to a 17-month high of 6.95 percent in March and wholesale price inflation (WPI) lived in a double digit for 12 consecutive months. Most economists expect MPC to climb the repo level at the next meeting in June.
MPC is mandated to target inflation at four percent with a ribbon tolerance two percentage on both sides.
In the latest policy, MPC has revised its retail inflation forecast to 5.7 percent for the current financial year which began April 1, compared to 4.5 percent projected before. This is because the increase in geopolitical tensions between Russia and Ukraine has sent crude oil prices to multi-year highs.
Meanwhile, the external member Jayanth Varma said that it was “fully appropriate” to drop the word “attitude” of monetary policy resolution.
“In a very uncertain situation that applies today, it is very important for MPC not to issue a forward guide that will tie his hand,” Varma said in the minutes. “It is necessary to clearly communicate that in future meetings, MPC will consider himself completely free to take any action at the level of policy that can be guaranteed by the data available in the coming weeks.”
Varma, who has debated the normalization of the policy corridor for several months now, adds that “imperative” for MPC to communicate its determination to ensure that inflation remains in the target forward.
According to Ashima Goyal, future policies will pause or raise interest rates. The increase in tariffs that responds to excessive demand, and persistent inflation, so the real level of adjusting smoothly and does not deviate too far from the best balance will be able to foster inflation expectations but maintain the recovery of growth and produce volatility and market output sacrifice, said goyal in minutes.