RBI must not pause rate tightening cycle prematurely: Monetary policy meeting minutes

Mumbai:

Most members of the Monetary Policy Committee said the RBI cannot afford to pause its rate-tightening cycle prematurely as inflation remains above its tolerance ceiling and core inflation remains sharply higher.

“Premature suspension of monetary policy action at this juncture would be a costly policy mistake,” Governor Shaktikanta Das wrote in minutes of the RBI’s policy meeting published today.

“Given the uncertain outlook, this could lead to the fact that we may find ourselves trying to catch up with stronger policy action at subsequent meetings to fend off heightened inflationary pressures.”

The Reserve Bank of India’s key policy rate was raised by 35 basis points to 6.25% in early December, the highest level in more than three years and the fifth consecutive hike to fend off high inflation.

The MPC is mandated to bring retail inflation down to 4% over the medium term while keeping it within the target range of 2%-6%.

The rate fell below the tolerance limit for the first time in November to 5.88 percent as food price increases slowed, surprising economists and some now expect a pause in rate hikes.

“Inflation in India remains unreasonably high, persistent and widespread, although it moderated in October only due to favorable base effects,” RBI deputy governor for monetary policy Michael Patra wrote.

He added: “Core inflation remains unrelenting and diffuse, with price momentum testing itself to the upper limit of tolerance and resolute monetary policy needed to quell it.”

Patras said further removal of easing was necessary to rebalance aggregate demand and supply conditions and bring inflation first back into tolerance and then in line with the target.

He said the MPC would need to see a clear fall in inflation in a series of monthly data before it could change its stance or it would be too soon.

However, not all members share these views. Outside members Jayant Varma and Ashima Goyal voted against the decision to retain the “accommodation exit” stance and said risks to growth were rising while inflation showed signs of easing.

“Economic growth is now extremely fragile and by no means sufficient to withstand excessive monetary tightening,” Varma wrote.

Goyal said now is the time to move to a neutral stance, with the movement being able to be data-based in any direction needed as new information influences forward forecasts.

“After bringing forward rate hikes from May 2022, there are now strong reasons to take the foot off the gas pedal while keeping a close eye on the trajectory of inflation,” wrote RBI executive director and member of the Monetary Policy Committee Rajiv Ranjan.

“Any change in stance at this stage could be interpreted as weakening our resolve to combat the threat of inflation and would impede monetary policy transmission.”

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