MPC hindered by rising inflation, growth dilemma

MUMBAI: Nurturing the economic green shoots amid soaring inflation complicated the decision-making for the Reserve Bank of India’s monetary policy committee (MPC), which ultimately voted unanimously to keep interest rates unchanged, minutes of the latest meeting released on Friday showed.

The MPC members observed that monetary policy is perhaps entering a more complex zone, given that growth is still fragile while persistent inflation is restricting monetary policy interventions to support growth.

RBI governor Shaktikanta Das said that a premature tightening of the monetary and liquidity policies would jeopardise the nascent recovery, possibly referring to calls for a liquidity mop-up from certain quarters.

“Even though the economic recovery is multi-speed as more sectors are showing an upturn, the improvement is not steady and continuous yet. Persistence of inflation at elevated levels constrains monetary policy at the current juncture,” Das said.

“At the same time, though recovery is underway, there is still a continuous need to nurture and support growth to make it broad-based and durable. A premature roll-back of the monetary and liquidity policies would be detrimental to the nascent recovery and growth,” Das said.

With growth gaining momentum and inflationary pressures continuing to remain elevated, MPC’s window of accommodation has become even more narrow, said Michael Patra, RBI deputy governor and a member of the rate-setting panel.

“Economic activity is recovering but hesitantly and unevenly. This warrants continuous policy support till it is set on a firm trajectory of self-sustaining expansion,” said Patra. “At the same time, the confluence of forces determining inflation outcomes and their likely persistence imparts downside risks to growth, unless contained early. Amid this high uncertainty, the monetary policy committee’s dilemma around its window of accommodation has become more acute than at the time of its last meeting,” said Patra.