RBI’s MPC members stress on controlling inflation

New Delhi, June 22 (FN Agency) Majority of the members of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) have stressed on bringing inflation under control, minutes of the committee’s latest meeting showed on Wednesday. The RBI had on June 8 hiked policy repo rate by 50 basis points (bps) to 4.90 per cent with immediate effect. The Monetary Policy Committee (MPC) or rate-setting panel’s decision had come close on the heels of an increase in repo rate by 40 basis points in an off-cycle meeting in May.

‘While high inflation continues to be the major concern, revival of economic activity remains steady and is gaining traction. The time is appropriate to go for a further increase in the policy rate to effectively deal with inflation and inflation expectations,’ RBI Governor Shakitkanta Das said. ‘As our policy in recent months has been unambiguously focused on withdrawal of accommodation, both in terms of liquidity and rates, the change in working stance should be seen as a continuation and fine-tuning of our recent approach. The withdrawal of accommodation, as I see it, would be non-disruptive to the process of recovery and would strengthen our ongoing efforts to combat inflation and anchor inflation expectations,” Das said. MPC member Michael Patra said as headline inflation levels will remain high across the world for some time, the thing to watch is the direction of inflation, not its level, which will remain elevated for some time in view of the overwhelming shocks. ‘If headline inflation starts moving down in the second half of the year, the objective of taking the policy rate above the level of future inflation will be achieved sooner than later, providing space to pause and reconfigure,” he said.

Prof Jayanth R Verma was of the opinion that more needs to be done in the MPC’s future meetings to bring the real policy rate to a modestly positive level consistent with the emerging inflation and growth dynamics. “I believe that the time is therefore ripe for MPC members to start moving towards providing projections of the future path of the policy rate. This would help stabilize long term bond markets and also anchor inflation expectations,” he said. Rajiv Ranjan said given inflation expectations in India are largely adaptive or backward looking, persistent supply disruptions and the resulting price pressures could get entrenched in higher inflation expectations. “Since the short-term trade-off between inflation and output worsens under high inflation expectations (the upward shift of the Phillips curve), this would call for front-loaded policy action to rein in inflation expectations,” he said.

Ashima Goyal said at the current stage of recovery, the one-year ahead real rate must not be more negative than minus percent. “A fifty or sixty basis point hike would achieve this, while looking through part of the spike in 2022 even as further supply-side movement and clarity on global developments are awaited,” Goyal said. “Such a real interest rate, while not dampening the recovery much, will prevent a possibly inflationary further rise in demand and unsustainable current account deficit. Markets benefit from recovery and so are better able to absorb rate hikes that are in step with the latter,” she said. The 36th meeting of the MPC was held during June 6 and 8, 2022.