It would be premature to declare an end to the monetary tightening cycle

The RBI’s Monetary Policy Committee brainstormed the impact of any future shocks on the inflation trajectory and stressed monitoring the cumulative effect of monetary policy actions over the past one year, which is still unfolding, revealed minutes of the rate-setting panel released on Thursday.

The minutes of the meeting of the Monetary Policy Committee (MPC), headed by Reserve Bank Governor Shaktikanta Das, also indicated it would be premature to declare an end to the monetary tightening cycle, which started in May 2022 to check high inflation following the outbreak of the Russia-Ukraine war. The central bank, which effected six back-to-back hikes in the key short-term lending rate (repo) since May 2022 to check high inflation, decided to take a pause early this month. The cumulative rate hike since May 2022 is 250 basis points. All six members of the MPC – three RBI officials and three appointed by the government – voted for pausing the rate at 6.5 per cent in the meeting held during April 3-6.

“The cumulative impact of our monetary policy actions over the last one year is still unfolding and needs to be monitored closely,” Das said during the last Monetary Policy Committee (MPC) meeting held during April 3-6. Inflation for 2023-24 is projected to soften, but the disinflation towards the target is likely to be slow and protracted. The projected inflation in Q4:2023-24 at 5.2 per cent would still be well above the target, he noted. “Therefore, at this juncture, we have to persevere with our focus on bringing about a durable moderation in inflation and at the same time give ourselves some time to monitor the impact of our past actions,” the governor noted.

Das said, “I am, therefore, of the view that we do a tactical pause in this meeting of the MPC”, as per the minutes of the MPC meeting released by the RBI. He further said there is better optimism on the rabi harvest despite the recent unseasonal rains and could significantly reduce price pressures on rabi food crops, particularly wheat. Further, prices of edible oils have been moderated. He also highlighted that while issues of geopolitics and high inflation continue to impact the outlook, the emergence of banking sector turmoil on both sides of the Atlantic and the sudden announcement of oil production cuts by the OPEC+ countries have rendered the global outlook even more uncertain. The softening of global commodity prices from their peak levels a year ago is translating into lower input cost pressures for manufactured goods and services.

“These could result in some softening of core inflation going forward. The overall situation, nonetheless, remains dynamic and fast evolving,” the governor said. MPC member Jayanth R Varma said the projected fall in the inflation rate would be a consequence of what the panel has already done, and not what it will do in the coming months. “At the same time, it is clear that the war against inflation has not yet been won, and it would be premature to declare an end to this tightening cycle. There is a need for heightened vigilance in the face of the fresh risks…,” said Varma, who is a professor at the Indian Institute of Management, Ahmedabad.

RBI Deputy Governor and MPC member Michael Debabrata Patra too opined that an ongoing assessment of the macroeconomic outlook should inform a preparedness to re-calibrate monetary policy towards a more restrictive stance with consistent actions, should risks to the inflation trajectory materialise and impede its alignment with the target. The process of getting inflation back to target could turn out to be gradual and uneven but the mission of monetary policy is to shepherd this process through potential bumps while containing second-round effects and anchoring inflation expectations, he added.

The government has mandated the central bank to ensure that retail inflation based on the consumer price index (CPI) remains at 4 per cent with a margin of 2 per cent on either side. Inflation during January-February 2023 exceeded the upper tolerance limit of 6 per cent after a transitory respite during November-December 2022. However, the retail inflation in March fell to a 15-month low of 5.66 per cent and came back to the Reserve Bank’s comfort level of 6 per cent. As per the minutes, RBI Executive Director Rajiv Ranjan, who too voted for status-quo in repo rate, stressed it was a ‘wait and watch’ pause.

“It is neither a ‘premature’ pause nor a ‘permanent’ one. Not ‘premature’ because we have already increased the policy rate by 250 bps in about a year with frontloaded rate action of about 190 bps during the first 5 months. “Not ‘permanent’ as any durable decline in inflation towards the target of 4 per cent is still distant,” the minutes quoted him as saying. Shashanka Bhide, MPC member, said the weather uncertainty affecting key agricultural prices globally and in the domestic markets, higher fuel and energy prices due to the supply disruptions resulting from geo-political conflicts and policies may lead to spikes in inflation rate and reversal of these shocks also may not be quick. In this context, it is important to assess the extent of the impact of monetary policy actions on the inflation rate, besides the other developments, said Bhide.

He is an Honorary Senior Advisor, at the National Council of Applied Economic Research, Delhi. MPC member Ashima Goyal too said that because of erratic weather and continuing global uncertainties, and until it is clear that inflation is well on the path to reaching the target, it is necessary to emphasise that this may not be the end of the rate hikes. “So, I also vote for withdrawal of accommodation as the stance. But this stance is now with respect to the repo rate, so it is consistent with the injection of durable liquidity if shocks are so large that LAF instruments prove inadequate,” said Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai. The next meeting of the MPC is scheduled for June 6-8.