In a scenario where inflation continues to remain elevated, a “premature pause” in monetary policy action would be a “costly policy error”, Reserve Bank of India Governor Shaktikanta Das said while voting for a 35 basis points hike in the repo rate in the December policy, according to the minutes of the Monetary Policy Committee (MPC) meeting released on Friday.
RBI Deputy Governor Michael Patra, who backed the 35 bps increase, expects inflation to remain above target over the next 12 months. The rate setting panel needs to see a decisive decline in inflation over a series of monthly readings before it shifts stance, Patra said.
In a 5:1 majority, the six-member MPC hiked the repo rate by 50 basis points (bps) to 6.25 per cent in the meeting held between December 5 to 7. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation.
Das said while the worst of inflation is behind us, it remains above the upper tolerance level. Hence, there is no room for complacency and the battle against inflation is not over. This necessitates a constant vigil on prices.
“I am, therefore, of the view that a premature pause in monetary policy action would be a costly policy error at this juncture.
Given the uncertain outlook, it may engender a situation where we may find ourselves striving to do a catch-up through stronger policy actions in the subsequent meetings to ward-off accentuated inflationary pressures,” the Governor said.
He said an increase of 35 bps in the repo rate – a departure from 50 bps on three previous occasions – itself conveys the signal of an improvement in the inflation outlook.
“Any change in stance at this stage could be interpreted as weakening of our resolve to fight the inflation menace and will impede monetary policy transmission,” RBI’s Executive Director Rajiv Ranjan said.
Patra said the effects of monetary policy actions taken so far, supported by improvements in supply responses, could break the 7 per cent plus drift in average headline inflation and at best contain it in the range of 5-6 per cent over the year ahead.
“Thus, inflation can be expected to remain above target over the next 12 months,” he said.
The consumer price-based inflation, or retail inflation, eased below 6 per cent in November – for the first time since January this year. It dropped to 5.88 per cent from 6.77 per cent in October.
“Should the incoming information indicate that the recent small easing of inflation is transient rather than the onset of a durable downturn, the MPC should be prepared to respond appropriately in order to achieve the desired inflation objective,” Patra said.
“In essence, the MPC needs to see a decisive decline in inflation over a series of monthly readings before it shifts stance, which would otherwise be premature,” he added.
One of the members of the Reserve Bank of India’s Monetary Policy Committee (MPC) Jayant Varma voted against the 35 basis points hike in repo rate.
“I believe that the 35 basis point rate hike approved by the majority of the MPC is not warranted in this context of reduced inflationary pressures and heightened growth concerns. I therefore vote against this resolution,” Varma said.
Varma also voted against the MPC stance on ‘withdrawal of accommodation’.
“I believe that 6.25 per cent itself very likely overshoots the repo rate needed to achieve price stability, and poses an unwarranted risk to economic growth. The majority of the MPC is saying that they intend to tighten even more by withdrawing accommodation. This stance would be even more damaging to the fragile growth outlook,” he said.
MPC’s independent member Ashima Goyal said inflation still exceeded the tolerance band for the 10th consecutive month and voted to raise the repo rate by 35 bps.
“I would have preferred a smaller rise of 25 bps, but 6.25 per cent works well as a focal rate,” Goyal said.
While voting against the MPC’s decision on remaining focused on ‘withdrawal of accommodation’, Goyal said, “The call money rate has exceeded the repo rate for much of the time. It is time to move to a neutral stance, where movement can be data-based in any required direction, as new information affects forward projections.”
Supporting the 35 bps rate hike, MPC member Shashanka Bhide said keeping in view the need to achieve moderation in the inflationary pressures in a sustained manner, continuing with the monetary policy tightening measures is necessary at this stage.
Ranjan said after front loaded rate hikes since May 2022, there is a strong case now to take the foot off the accelerator while keeping a sharp vigil on the inflation trajectory. He also backed the decision to hike repo rate by 35 bps.
“Any change in stance at this stage could be interpreted as weakening of our resolve to fight the inflation menace and will impede monetary policy transmission,” Ranjan said.