RBI pledged to bring inflation back within target, MPC minutes reveal
“The time has come to opt for a further increase in the policy rate to effectively address inflation and inflation expectations,” said RBI Governor Shakitkanta Das, who leads the six-member panel.
“The change in attitude language should be understood as a continuation and adjustment of our recent approach,” RBI Governor Das said. “Our policy over the past few months has unquestionably been geared towards housing withdrawal, both in terms of liquidity and rates.” “In my view, the withdrawal of accommodation would not harm the economic process and would strengthen our ongoing initiatives to fight inflation and stabilize inflation expectations.”
Monetary Policy Committee (India)
The Monetary Policy Committee sets the benchmark interest rate in India. The Monetary Policy Committee (MPC) meets at least four times a year (more precisely at least once per QUARTER) and makes its decisions after each of these meetings.
Six people make up the committee: three employees of the Reserve Bank of India (RBI) and three foreigners chosen by the Indian government. For “maximum confidentiality”, they must observe a “period of silence” for seven days before and after the determination of the rate. The ex officio chairman of the committee is the Governor of the Reserve Bank of India (RBI). The governor has the casting vote in the event of a tie, and the majority vote makes the decisions.
To counter mounting price pressure, the MPC raised the repo rate by 50 basis points on June 8, nearly a month after previously raising it by 40 basis points at an off-cycle policy meeting. . A tenth of a percentage point is called a basis point.
Retail price inflation fell from a nearly eight-year high of 7.79% in April to 7.04% in May. However, for 32 consecutive months, inflation exceeded the RBI’s medium-term target of 4%. More worryingly, it has now gone five months without falling below the upper 6% of the 2-6% tolerance range.
At its last meeting, the RBI raised its inflation forecast for this fiscal year to 6.7% while maintaining its growth forecast at 7.2%.
The Covid-19 outbreak and subsequent lockdowns had a slow but steady negative impact on India’s economy. By raising the repo rate and gradually removing excess liquidity from the banking sector, the RBI, like the majority of central banks around the world, is trying to reduce the pandemic-era impulse.
“The direction, not the level, of inflation should be monitored”
In minutes released June 22, Deputy Governor Michael Patra said overall levels of headline inflation would remain elevated for some time. As a result, one should watch the direction of inflation rather than its level, which will continue to be higher for some time due to the strong shocks.
Patra said in the minutes that if headline inflation begins to decline in the second half of the year, “the earlier the objective of raising the policy rate beyond the level of future inflation will be possible, providing an opportunity to stop and reconfigure.”
According to Patra, the RBI should strive to bring inflation down to the acceptable range by January-March or April-June and gradually bring it towards the target in FY23.
Patra also said that since monetary policy involves lags, the MPC’s goal should be to raise the repo rate to at least above the inflation forecast for the next four quarters.
In the wake of monetary tightening, Patra said, “it is simultaneously vital to condition public perceptions and expectations that growth will be closer to 6% than 7% in 2023-24.”
According to external member Jayanth Varma, in order to bring the real policy rate to a slightly positive level consistent with the evolution of inflation and economic dynamics, more work needs to be done in the upcoming MPC meetings.
“Therefore, in my view, the time has come for MPC members to begin taking steps to provide estimates of where the policy rate will move in the future. Minutes reported that Verma suggested this would support expectations inflation while stabilizing long-term bond markets.
Ashima Goyal, another member, asserted that the real one-year forward rate should not be more negative than 1% at the current stage of the recovery.
According to Goyal, “a fifty or sixty basis point hike would do that while looking at some of the peak in 2022, although some additional supply-side movement and clarity on global events is needed.” Such a real interest rate will be avoided by a possible further increase in request and an unsustainable current account deficit, which will not significantly slow the recovery. The markets benefit from the recovery, which allows them to resist the rate hikes that follow.
According to Rajiv Ranjan, Executive Director of the RBI, the prolonged supply disruptions and resulting price pressures could be rooted in higher inflation expectations, given that India’s inflation forecasts were mostly adaptive or retrospective.
According to Ranjan, “this would require immediate policy action to rein in inflation expectations since the short-term trade-off between inflation and output worsens at high inflation expectations (the upward shift in inflation Phillips curve)”.
Shashanka Bhide added that unless the foreign supply situation improves soon, inflationary pressures that have escalated since March are likely to persist as a problem in FY23. To ensure a macroeconomic climate stable, he said it was essential to reduce inflationary pressures now.
For its bi-monthly review, the panel will now meet in August.