MPC minutes flag inflation worry; aim to bring CPI within target band by Q4

The minutes of the Monetary Policy Committee’s June 5-8 meeting expectedly showed an increased degree of concern among members regarding upside risks to India’s inflation amid surging commodity prices.

With India’s inflation remaining above the upper bound of the MPC’s 2-6 per cent tolerance band for the first five months of 2022, all members of the rate-setting panel acknowledged the need for further hikes in interest rates, the minutes showed.

“The objective should be to take the repo rate to a height that is at least above the four quarters ahead forecast of inflation, knowing that monetary policy works with lags,” Reserve Bank of India Deputy Governor Michael Patra’s portion of the minutes read.

“Our endeavour should be to bring down inflation into the tolerance band by the last quarter of 2022-23 or the first quarter of 2023-24 and progressively align it to the target during the course of 2023-24.”

Inflation as measured by the CPI index was 7.04 per cent in May. In its June policy review, MPC raised the repo rate by 50 basis points to 4.90 per cent, taking the total tally of rate hikes since May to 90 basis points.

At the June statement, the MPC forecast average headline retail inflation at 6.7 per cent for the current financial year, sharply higher than 5.7 per cent predicted earlier.

RBI Governor Shaktikanta Das pointed out that the repo rate was still lower than pre-pandemic levels and that the liquidity surplus in the banking system was higher than what it was prior to the Covid crisis.

In the June policy review, the MPC changed the wording of its stance to say that it had decided to remain focused on withdrawal of accommodation as against the May policy statement in which it said that MPC also decided to remain accommodative while focusing on withdrawal of accommodation.

“As our policy in recent months has been unambiguously focussed on withdrawal of accommodation, both in terms of liquidity and rates, the change in wording of stance should be seen as a continuation and fine-tuning of our recent approach,” Das’ statement in the minutes read.

“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.”

According to MPC member and Emeritus Professor, Indira Gandhi Institute of Development Research, Ashima Goyal, it was required that policy pay attention to the recovery as India was coming out of a pandemic-induced slump.

This is in contrast to 2011, when the Indian economy was coming out of a boom with clear signs of overheating, she said in the minutes.

“At the current stage of recovery, however, the one-year ahead real rate must not be more negative than -1%. A fifty or sixty basis point hike would achieve this, while looking through part of the spike in 2022,” Goyal said.

With the MPC’s inflation forecast for this year pointing towards a potential failure of the committee to achieve its mandate of preventing consumer prices from slipping out of the band for three consecutive quarters, Patra wrote that there were some who failed to differentiate between a procedural issue and sensationalism.

“On one side are the nihilists – they lick their lips and obsess that the RBI, like a lamb to the slaughter, is about to fail in its monetary policy mandate.”

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