Though inflation has moderated and plateaued since its recent peak of April 2022, it remains unacceptably and uncomfortably high, Reserve Bank of India (RBI) Governor Shaktikanta Das said in his intervention during the Monetary Policy Committee Meeting held August 3-5, as per the minutes of the meeting released on Friday.
“Sustained high inflation, unless addressed effectively, could result in unanchoring of inflation expectations and their second-order effects. This necessitates an appropriate monetary policy response to prevent 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 and, therefore, vote accordingly. I also vote for remaining focused on withdrawal of accommodation,” Das said while making a pitch for the hike in policy repo rate.
During the MPC meeting, Das noted, “High level of inflation continues to be broad-based with 13 out of 23 CPI sub-groups/groups, comprising close to 60 per cent of the CPI basket, registering more than 6 per cent inflation in June 2022.”
“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.
During the meeting, the MPC decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 5.40 per cent with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent.
The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, the RBI said.
The thirty-seventh meeting of the Monetary Policy Committee (MPC), constituted under section 45ZB of the Reserve Bank of India Act, 1934, was held during August 3 to 5, 2022.
The meeting was attended by all the members – Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, Delhi; Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai; Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad; Rajiv Ranjan, Executive Director (the officer of the Reserve Bank nominated by the Central Board under Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934); Michael Debabrata Patra, Deputy Governor in charge of monetary policy – and was chaired by Shaktikanta Das, Governor, RBI.
In order to decide on the policy rates, the MPC reviewed the surveys conducted by the Reserve Bank to gauge consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The MPC also reviewed in detail the staff’s macroeconomic projections, and alternative scenarios around various risks to the outlook.