A premature pause in the monetary policy action would be a costly policy error at this juncture, according to RBI Governor Shaktikanta Das’ statement at the last monetary policy committee (MPC) meeting.

“Given the uncertain outlook, it (a pause) 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. I, therefore, vote for an increase of 35 bps in the repo rate (from 5.90 per cent to 6.25 per cent) — a departure from 50 bps on three previous occasions — which itself conveys the signal of an improvement in the inflation outlook,” Das said.

RBI released the minutes of the MPC meeting (held from December 5-7) on Wednesday. The Governor emphasised that MPC’s successive rate actions since May 2022 are working through the system.

Medium-term growth

“Considering the elevated inflation levels, especially the stickiness in core inflation, further calibrated monetary policy action is warranted to contain build-up in underlying inflationary pressures, keep inflation expectations anchored and bring inflation closer to the target rate of 4 per cent over the medium term. This would strengthen the medium-term growth prospects of the Indian economy,” he said.

At the MPC meeting, out of the six members, only Jayanth R Varma, Professor, IIM Ahmedabad, voted against the repo rate hike. Further, Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, and Varma voted against the resolution to remain focused on the withdrawal of accommodation, with the remaining members voting in favour.

Varma said: “I believe that the 35 bps rate hike approved by the majority of the MPC is not warranted in this context of reduced inflationary pressures and heightened growth concerns... 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 and I therefore vote against this resolution also.”

Goyal observed that withdrawal of accommodation was alright as long as the large liquidity surpluses and excessive rate cuts of pandemic times persisted. But durable liquidity seems to have contracted so much that the LAF (liquidity adjustment facility) system has not been able to compensate for liquidity shocks during the last two months.

“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. Accordingly, I vote against the part of the resolution on remaining focused on the withdrawal of accommodation,” she said.