India's Monetary Policy Committee decided to keep the benchmark repo rate unchanged for the second straight meeting earlier in June, even as it emphasised the need to bring inflation closer to the target of 4%.
Minutes of the committee's meeting indicate that members of the committee remain wary of inflation as they expect the pace of price rise to pick up in the coming months.
Job Only Half-Done, Says Shaktikanta Das
"Our job is only half done, having brought inflation within the target band," said RBI Governor Shaktikanta Das. "Our fight against inflation is not yet over," he said. "We need to undertake forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if situation so warrants."
"Beyond this and given the prevailing uncertainties, it is difficult to give any definitive forward guidance about our future course of action in a rate tightening cycle," he said.
The MPC will continue to remain agile and flexible in managing liquidity through two-way operations, he said, adding that durable price and financial stability are mutually reinforcing and necessitate greater policy focus at the current juncture.
Taking A Middle Stump Guard: Patra
The near-term outlook for inflation is also relatively benign vis-a-vis the 2022-23 experience, said Deputy Governor Michael Patra.
However, beyond the first quarter, pressure points emanating from specific supply-demand mismatches could impart upward pressure to the momentum of prices and offset favourable base effects, especially in the second half of 2023-24, he cautioned. "Hence, monetary policy needs to remain in ‘brace' mode, ensuring that the effects of these shocks dissipate without leaving scars on the economy."
"My vote for maintaining status quo on the policy rate should be seen as taking middle stump guard, to prepare for a bouncier pitch," Patra reaffirmed.
Holding the rate unchanged should not be interpreted as the interest rate cycle having peaked, but as a period of careful evaluation of a decision on the extent of additional policy tightening if needed, he said.
This is part of continuous learning about the underlying structure of the economy with new information until the next meeting of the MPC, and not a prolonged pause, Patra said.
Headline inflation is edging down towards the target, but it is still well above it and the balance of risks suggests that it will go up in coming months before it comes down, the deputy governor said. "Therefore, continuing with the stance of withdrawal of accommodation is appropriate, as it adequately conveys the future course of interest rates in the economy."
Stance Shows Disconnect From Reality: Jayanth Varma
"I am of the view that the current level of the repo rate is high enough to keep inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band," said MPC member Jayanth R. Varma.
However, there are significant risks to both inflation and growth, and the process of bringing inflation under control is still very much work-in-progress, he said. It would be premature to declare victory at this point of time, based on the inflation prints of just a couple of months.
"In this context, I am not at all comfortable with the self-congratulatory tone of ... the Monetary Policy Statement that the MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band," Varma said.
"Turning to the stance, I find that with every successive meeting, this stance is becoming more and more disconnected from reality," he said.
Based on the inflation forecast of 5.1% for 2023-24, the real repo rate is now almost 1.5%, he said. In other words, the monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy, according to him.
Despite this, the majority of the MPC wishes to remain focused on withdrawal of accommodation, "whatever that phrase might mean," he said. "I have therefore seriously considered dissenting on this part of the resolution, but after careful thought I have decided to confine myself to expressing reservations on it."
"The main reason for not dissenting is that, after two successive meetings at which the repo rate has been left unchanged, this stance now appears more vestigial than a serious statement of intent," Varma said.
RBI Executive Director Rajiv Ranjan said that continuity in the stance with a clear-cut objective of aligning inflation to the 4% target is important. Any premature change in stance may be hasty and could undo the hard work done so far, he explained, saying that it may also tamper with the transmission process that is currently underway.
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