The minutes of the MPC meeting released on Friday show that there was an extensive discussion on the stance of the monetary policy. Stating that consumption and investment is still subdued, Das said, “There is also a risk that the ongoing recovery, which is already strained by the current crisis, may get undermined if there is rapid tightening of financial conditions. In these circumstances, policymaking has to be nuanced and nimble”.
Members were, however, prepared to take action given the surge in inflation. “The domestic inflation outlook presented in the February 2022 MPC meeting has undergone a significant upward shift since the start of the war on February 24, 2022, with the escalation of conflict and subsequent turmoil in global commodity markets,” said Das. He added that the increase in crude oil price and its direct and indirect effects on CPI contributed to around 60% of the upward revision in projections with the other major contributor being the spillovers coming from the global food price shocks.
While Das was cautious in talking about the policy response for higher rates, other members hinted at future action. “If, as the projections show, inflation persists in high reaches, the drainage of liquidity already achieved and planned for the year ahead will reduce risks of excess liquidity fanning inflationary pressures and posing threats to financial stability. It will also facilitate the transmission of policy impulses across market segments and the interest rate structure,” said Michael Patra, deputy governor, RBI said.
External member Jayant Varma, who had been calling for normalisation of the policy corridor, for months said that the policy should not have a stance. “In the extremely uncertain situation that prevails today, it is very important for the MPC not to issue any forward guidance that would tie its hands. 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”. Varma said that he was not getting into policy action discussion as the prior forward guidance precluded any such action.
Mridul K Saggar, deputy governor, RBI said that global inflation is here to stay and is ruling at multi-year high in many emerging markets. In India too, inflation which breached the upper tolerance level is expected to remain high in Q1 of the current fiscal. “A close watch on inflation expectations is necessary. If expectations are rising, especially if they turn unhinged and start rising faster than even actual inflation, monetary policy would have to reign in expectations to prevent a self-sustained inflationary spiral,” said Saggar.
Among external members, Shashanka Bhide voted to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Another external member Ashima Goyal seemed to indicate that RBI was already behind in rate hikes. “Research as well as Indian experience in the 2000s shows an early and gradual rise works better. Rebalancing of liquidity began early. It is time now to withdraw crisis time accommodation in terms of moving towards the equilibrium or neutral real rates consistent with non-inflationary growth. As long as rates remain below this, it is still not a tightening regime,” she said.
