With the Russia-Ukraine war posing major upside risks to inflation and downside risks to global growth, the situation is particularly challenging for net oil importing countries like India, according to Reserve Bank of India (RBI) Governor Shaktikanta Das.

“Emerging market economies find themselves in a much more difficult situation as their economic recovery from the pandemic remains incomplete even as inflation continues its ascent.

“Central banks in these economies face the difficult trade-off between containing inflation and nurturing growth,” said Das.

The RBI released the minutes of the six-member monetary policy committee’s three-day meeting (April 6 to 8, 2022) on Friday.

The Governor emphasised that while the risks to domestic growth call for continued accommodative monetary policy, inflationary pressures necessitate monetary policy action.

“The circumstances warrant prioritising inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability, while being mindful of the ongoing growth recovery. There is also a need to avoid undue disruptions in the financial markets,” said Das.

Referring to the alarm about inflation getting globalised, MD Patra, Deputy Governor, RBI, said the view that increasingly takes centrestage is that irrespective of whether supply bottlenecks are the driver or pent-up demand, it will become more difficult to tame inflation the longer the fight is delayed.

“To quote an influential view, it will make central banks unpopular, but they have been there before.

“…Supply disruptions, soaring commodity prices and ensuing financial market turbulence no more tell about fears of the shape of future inflation – the worst fears are already materialising. Instead they darken the outlook for growth,” said Patra.

Mridul K Saggar, Executive Director, RBI, observed that recovering to pre-pandemic trend should not guide monetary policy at this stage and policy should focus on non-inflationary sustainable growth in the economy.

Underscoring that a close watch on inflation expectations is necessary, he said if expectations are rising, especially if they turn unhinged and start rising faster than even actual inflation, monetary policy would have to reign in expectations to prevent a self-sustained inflationary spiral.

“The best way to support growth on a durable basis is to have a strong commitment to low and stable inflation. I wish to sign off with this note,” said Saggar.

Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, opined that future policy will either pause or raise rates.

“Rebalancing of liquidity started in 2021, and has now reached a level, with new facilities to absorb liquidity, that is compatible with raising policy rates. Short rates are set to rise to make the repo rate the operational policy rate again.

“Research as well as Indian experience in the 2000s shows an early and gradual rise works better. Rebalancing of liquidity began early. It is time now to withdraw crisis time accommodation in terms of moving towards the equilibrium or neutral real rates consistent with non-inflationary growth,” she said.

Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, said response to the evolving price conditions and broadbased policy measures to effectively bring down inflationary pressures without disrupting the favourable environment for sustaining growth are now needed.

Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad, felt that maintaining the policy rate at the current level is the only sensible choice.

“With inflation projected to breach the upper tolerance limit for several months, it is imperative for the MPC to communicate its resolve to ensure that inflation remains within the target going forward. It is also necessary to prepare the markets for the withdrawal of the post pandemic monetary accommodation,” he said.

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