Monetary Policy Committee (MPC) member Jayanth R Varma suggested dropping the resolution on “remaining focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth” at the Committee’s last meeting as he felt it is better not to give any guidance than to give confusing guidance.

The Indian Institute of Management, Ahmedabad, Professor, was the lone member of the six-member MPC to express reservation on the aforementioned resolution even as he voted with them to increase the policy repo rate from 4.90 per cent to 5.40 per cent to rein in inflationary pressures, as per the Minutes of the latest MPC meeting released on Friday.

Referring to the “withdrawal of accommodation” resolution, Varma reasoned that: “This statement confuses more than it clarifies. Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation” cannot refer to the withdrawal of the pandemic era accommodation.

“It can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50 per cent to 6.25 per cent in February 2019. A plain reading of this resolution would then be that the MPC is focused on taking the repo rate back to 6.50 per cent. In my view, such an indication of a terminal repo rate of 6.50 per cent is totally unwarranted in the situation that we are in.”

The professor underscored that to focus on one thing implies paying less attention to other things.

“And I do not think it would be wise to say that the MPC will remain “focused” on the withdrawal of accommodation, ignoring other considerations... The resolution should, in my view, be interpreted only as stating that there is a high likelihood of further front-loaded tightening without restricting the freedom of the MPC to respond to the changing environment in a data-driven manner,” he said.

Inflation remains high

RBI Governor Shaktikanta Das noted that though inflation has moderated and plateaued since its recent peak of April 2022, it remains unacceptably and uncomfortably high.

“Going forward, though there are early indications that inflation might have peaked in April, significant uncertainties remain on account of adverse global spillovers coming from simmering geopolitical tensions, volatile global commodity prices and financial markets.

“While the let-up in global food and industrial metals prices should lower imported inflation, the appreciation of the US dollar could offset some of the gains. Persistently elevated cost of living conditions can engender wage-price spirals, especially as firms regain pricing power,” he said.

Das emphasised that domestic growth, on the other hand, remains resilient and gives MPC the space to act.

“Sustained high inflation, unless addressed effectively, could result in the unanchoring of inflation expectations and their second-order effects. This necessitates an appropriate monetary policy response to prevent an upward drift in inflation from the target rate. I am of the view that at this juncture, a 50 bps increase in the repo rate is necessary,” he said.

MD Patra, Deputy Governor, underscored that each country is on its own—match the Fed or face currency depreciation, imported inflation, wider current account imbalances, capital outflows, and reserve losses. Meanwhile, the war in Ukraine appears to be broadening, and it is unlikely to cease soon.

“Although inflation seems to have peaked, it is still unconscionably high. Risks to the trajectory of inflation in the form of currency depreciation, seasonal pressures, and the monsoon’s uneven progress could upend the moderation in momentum recently recorded. Monetary policy’s response to supply shocks has to be predicated on managing expectations and fortifying credibility.

“By frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target,” Patra said.

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