MPC members indicate more rate hikes to tackle rising inflation

The members of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) indicated more interest rate hike in the coming months to tackle rising inflation, minutes of the June policy review rele¬ased on Wednesday showed.

The rate-setting committee has increased the policy repo rate by 90 basis points in May and June, to 4.9 per cent. Consumer price index-based inflation stayed above the upper tolerance band of 6 per cent for all the five months in 2022. “The objective should be to take the repo rate to a height that is at least above the four quarters ahead forecast of inflation, knowing that monetary policy works with lags,” RBI Deputy Governor Michael Patra said in the minutes.

“Our endeavour should be to bring down inflation into the tolerance band by the last quarter of 2022-23 or the first quarter of 2023-24 and progressively align it to the target during the course of 2023-24.”

In June, the MPC revised the projection for headline retail inflation to 6.7 per cent for the current fiscal year, from 5.7 per cent predicted earlier.

Patra said inflation will fall back to below 6 per cent by the fourth quarter of 2022-23. “In 2023-24, it should moderate to 4 per cent. This is the most pragmatic result that can be hoped for under the prevailing extraordinary circumstances.”
 

RBI Governor Shaktikanta Das pointed out that the repo rate was still lower than pre-pandemic levels and that the liquidity surplus in the banking system was higher than what it was prior to the Covid-19 crisis.

In the June policy review, the MPC changed the wording of its stance to say it had decided to remain focused on withdrawal of accommodation as against the May policy statement in which it said that MPC also decided to remain accommodative while focusing on withdrawal of accommodation.

“As our policy in recent months has been unambiguously focussed on withdrawal of accommodation, both in terms of liquidity and rates, the change in wording of stance should be seen as a continuation and fine-tuning of our recent approach,” Das’ statement in the minutes read.

“The withdrawal of accommodation, as I see it, would be non-disruptive to the process of recovery and would strengthen our ongoing efforts to combat inflation and anchor inflation expectations.”

“Clearly, more needs to be done in future meetings to bring the real policy rate to a modestly positive level consistent with the emerging inflation and growth dynamics,” external member Jayanth Varma said.

The real interest rate is the difference between the repo rate and inflation, which is around -2% now.

“If the CPI inflation in FY2024 moderates to 4%, as alluded to by Dr. Patra, then our expectation that the additional repo hikes in this tightening cycle will be limited to 60 bps, will yield a positive real rate of 1.5%,” Aditi Nayar, Chief Economist, ICRA.

Varma argued that the central bank should communicate the future magnitude of expected repo rate hike to the market.

“It appears to me however that as the MPC navigates this process of withdrawal, there is merit in signalling the likely pace of this tightening in more quantitative terms. Many leading central banks currently provide forecasts of the future path of the policy rate several quarters ahead,” Varma said.