MUMBAI: India’s central bank cannot afford to prematurely pause its rate tightening cycle with inflation staying above its upper tolerance band and core inflation remaining sharply elevated, a majority of the members of the monetary policy committee said.
“A premature pause in monetary policy action would be a costly policy error at this juncture,” Governor Shaktikanta Das wrote in the minutes of the policy meeting released by the Reserve Bank of India on Wednesday.
“Given the uncertain outlook, it 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.”
The RBI’s key policy rate was raised by 35 basis points to 6.25% earlier in December, the highest level in over three years and its fifth straight increase to ward off high inflation.
The MPC is mandated to bring retail inflation down to 4% over the medium term while keeping it within the target band of 2%-6%.
It eased below the upper tolerance level for the first time this year in November, to 5.88%, amid a softer rise in food prices, surprising economists, with some now expecting a pause in rate hikes.
“Inflation in India remains unconscionably elevated, persistent and generalised, despite a grudging let-up in October solely due to favourable base effects,” RBI deputy governor in-charge of monetary policy Michael Patra wrote.
“Core inflation remains unyielding and diffused, with a rising price momentum as it tests the upper tolerance band on its own, warranting resolute monetary policy resolve to quell it,” he added.
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Patra said a further withdrawal of accommodation was warranted to re-balance aggregate demand against supply conditions and return inflation first into the tolerance band and then to alignment with the target.
He said the MPC needs to see a decisive decline in inflation over a series of monthly readings before it shifts stance, which would otherwise be premature.
Not all members, however, agreed with these views. External members Jayant Varma and Ashima Goyal voted against the decision to retain the “accomodation withdrawal” stance and said risks to economic growth were rising while inflation was showing signs of easing.
“Economic growth is now extremely fragile and definitely not robust enough to withstand excessive monetary tightening,” Varma wrote.
Goyal said it was time to move to a neutral stance, where movement could be data-based in any required direction, as new information affected forward projections.
“After frontloaded rate hikes since May 2022, there is a strong case now to take the foot off the accelerator while keeping a sharp vigil on the inflation trajectory,” RBI executive director and MPC member Rajiv Ranjan wrote.
“Any change in stance at this stage could be interpreted as weakening of our resolve to fight the inflation menace and will impede monetary policy transmission”.
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