RBI’s MPC bats for action in wake of high inflation
ON APRIL 8, THE COMMITTEE INDICATED ITS INTENT TO EXIT THE ‘ULTRAACCOMMODATIVE’ STANCE
Members of the central bank’s rate-setting panel stressed the need for monetary policy action at its early April meeting amid rising inflation, even as risks to domestic growth favoured an accommodative stance, minutes of the meeting released on Friday showed.
On April 8, the monetary policy committee (MPC) indicated its intent to exit the “ultra-accommodative” stance it took during the pandemic, even as it kept policy rates unchanged and decided to prioritize inflation over growth. Economists expect the Reserve Bank of India to start raising policy rates by at least 25 basis points from June.
“The current geopolitical situation has led to an upward revision of our inflation projections for 2022-23. The estimates now point to inflation remaining above the upper tolerance band in the near term, even as growth projections have undergone downward revisions. These are indicative of the sheer magnitude of the adverse exogenous supply and price shocks. While the risks to domestic growth call for continued accommodative monetary policy, inflationary pressures necessitate monetary policy action,” said Shaktikanta Das, governor, RBI.
Jayant Verma, the lone dissenter in the MPC, argued that MPC must communicate its resolve to ensure inflation remains within the target.
“I have been arguing for the normalization of the policy corridor for several months now, and I welcome this action which forms part of the MPC state-consultation ment,” Verma said. “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, MPC would consider itself completely free to take any action on the policy rates that may be warranted by the data that becomes available in the coming weeks,” he added.
RBI executive director Mridul Saggar said that recovering to the pre-pandemic trend should not guide monetary policy at this stage, and policy should instead focus on non-inflationary sustainable growth. That said, he believes that policy normalization can happen through a combination of liquidity and rate actions.
“Considering the emergence of a different growth-inflation trade-off, it is best to start withdrawing monetary accommodation through liquidity and rate actions that can begin with raising the floor and normalizing the corridor. The policy will still stay accommodative as rates, even after lifting nominal rates, will stay below the real neutral rate for the foreseeable future. Monetary policy is not rocket science, but the timing of the launch of the rocket is nevertheless important as monetary policy transmits to its final goals with long and variable lags...,” Saggar said.