The future trajectory of CPI inflation “remains clouded” with uncertainty from geopolitical conflicts, possibility of further supply disruptions, volatile financial market conditions and domestic weather-related factors, RBI Governor Shaktikanta Das said in the MPC’s September meeting.

“We need to do whatever is necessary and under our control to restrain broadening of price pressures, anchor inflation expectations and contain second round effects,” he said, as per the minutes released on Friday.

Calibrated monetary policy action is required for sustain medium-term growth prospects, Das said, adding that while global factors are putting pressure on external demand, high frequency indicators show that India is expected to be among the fastest growing major economies.

Aligning inflation with the target

All members voted to increase the policy repo rate by 50 bps, except Ashima Goyal who voted for a 35 bps hike. Further, all except Jayanth Varma, voted to remain focused on withdrawal of accommodation to combat inflation while supporting growth.

Including the 50 bps rate hike in September, the MPC has raised the repo rate by 190 bps since May to 5.9 per cent. Headline retail inflation rose to 7.4 per cent in September — the third consecutive quarter of breaching the RBI’s 2-6 per cent band. RBI has pegged inflation for FY23 at 6.7 per cent.

“The focus should be on being time consistent in aligning inflation with the target. Front-loading of monetary policy actions can keep inflation expectations firmly anchored and balance demand against supply so that core inflation pressures ease,” RBI Deputy Governor Michael Patra said.

Goyal argued that the demand for a 50 bps hike is a “fear-driven reaction” to preserve the spread with US policy rates. “In the past two years, spreads of above 300 bps have not brought in debt flows. If the terminal Fed rate is 5 per cent, will it require we raise ours to 8 per cent?” she said, adding that India has earned enough independence to protect itself from policy errors of other nations.

Now that forward-looking real interest rates are positive, the MPC needs to move “very carefully” to avoid a “costly” overreaction as the lagged effects of monetary policy are large in India.

External member Jayanth Varma said the MPC should pause at 6 per cent repo rate due to the lag effect, which may take up to six quarters for complete transmission. “If we were to continue to tighten without a reality check, we would run the risk of overshooting the repo rate needed to achieve price stability,” Varma said, adding that it would be dangerous to push the policy rate well above the neutral rate when the growth outlook is very fragile.