Price pressures in India remain high and it would be premature to lower the guard on inflation, majority of the members of the Reserve Bank of India’s (RBI) monetary policy committee (MPC) wrote according to minutes published on Wednesday.
Earlier in February, the MPC hiked the key repo rate by a quarter percentage point, as expected, but surprised markets by leaving the door open to more tightening, saying core inflation remained high.
“It will be premature to pause when there are no definitive signs of slowdown in inflation, particularly core inflation,” RBI executive director and MPC member Rajiv Ranjan wrote.
“Nevertheless, as the policy rate adjusted for inflation has now turned positive, albeit barely so, there is a case for paring down the pace of rate hike to the usual 25 bps,” he added.
According to the minutes of the MPC meeting released on Wednesday, RBI Governor Shaktikanta Das also mentioned that there is considerable uncertainty due to a host of global factors such as rising non-oil commodity prices.
Das, who heads the six-member MPC, also said overall, there is considerable uncertainty at this stage on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices and also weather-related events.
He also said 25 basis points rate increase provides space to calibrate future monetary policy actions and stance based on evolving macroeconomic conditions.
Persistently high core inflation is a crucial concern at this stage, said external member Shashanka Bhide.
“It is important to reduce the demand side pressures on inflation and bring the inflation expectations of the various stake holders closer to the policy target to sustain the growth momentum”.
India’s annual retail inflation rate INCPIY=ECI rose to 6.52% in January from 5.72% in December, breaching the central bank’s upper threshold for the first time in three months, on higher food prices.
The monetary policy stance will need to remain disinflationary till inflation is returned to target, RBI deputy governor Michael Patra said.
External members Jayant Varma and Ashima Goyal, however, voted against the decision to raise the key repo rate.
“In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24,” Varma said. It was the sixth interest rate hike by the Reserve Bank of India (RBI) since May last year, taking the total quantum of increase to 250 basis points.
The MPC is mandated to bring retail inflation down to 4% over the medium term, while keeping it within the target band of 2%-6%.
Goyal, warned that as the aggressive MPC tightening is more fully passed through, it will further reduce demand.
“It is better to give time for possible softening of both inflation and growth and effects of past monetary tightening to play out,” she said.
The continuing global uncertainity has complicated the fight against inflation, opined Reserve Bank Deputy Governor Michael Debabrata Patra during the Monetary Policy Committee meeting held on February 8.
”The fight against inflation is complicated by the global outlook. There is some consensus growing around a milder slowdown than earlier feared, although geographical disparities complicate the prognosis. Be that as it may, the outlook for global inflation is turning more uncertain than before,” Patra opined as per minutes of the Monetary Policy Committee (MPC).