RBI MPC Minutes Show Deepening Concerns Over Inflation Pressures

The Monetary Policy Committee (MPC) at its meeting decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

The meeting was attended by Dr. Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, Delhi; Dr. Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai; Prof. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad; Dr. 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); Dr. Michael Debabrata Patra, Deputy Governor in charge of monetary policy and was chaired by Shaktikanta Das, Governor.

Statement by Governor Shaktikanta Das

RBI Governor said, “The global economic outlook has improved since the December (2022) meeting of the MPC. Inflation in major countries has eased in recent prints but remains significantly above their respective targets. Monetary policy is thus expected to remain in a tightening mode, but there is uncertainty about its trajectory. This is leading to bouts of volatility in global financial markets whose spillovers are posing challenges to emerging market economies”.

He further said, “In a world of extreme uncertainty, India is witnessing a conducive environment of macroeconomic stability: the economy remains resilient; inflation has moderated in the past two months to below 6 percent; fiscal consolidation is gaining traction; current account deficit is showing signs of moderation; forex reserves have improved; and the banking sector remains healthy”.

“The sustained buoyancy in domestic demand, especially private consumption, and investment, is driving growth. While weak external demand is a drag on our merchandise exports, the growth of remittances and exports of services is robust. Going ahead, the persisting recovery in contact-intensive services and good prospects of rabi production are likely to support urban and rural consumption. The enhanced thrust on capital spending and infrastructure in the Union Budget 2023-24 should bolster manufacturing and investment activity”, he added.

Shaktikanta Das said, “CPI inflation has moderated primarily due to lower vegetable prices. Core inflation (i.e., CPI excluding food and fuel), however, is elevated and sticky at around 6 percent. CPI inflation excluding vegetables has moved higher. Going forward, the baseline projections indicate that headline inflation is likely to moderate to 5.3 percent in 2023-24. These projections also indicate that the disinflation toward the target rate is likely to be protracted given the stickiness of core inflation at elevated levels. The durability of a disinflation process cannot solely rely on food inflation, given its uncertainty and susceptibility to weather events. Overall, there is considerable uncertainty at this stage on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices, and also weather-related events”.

“We must, therefore, remain unwavering in our commitment to bring down inflation to ensure a decisive and durable moderation in inflation towards the target of 4 percent over the medium term, while being mindful of growth. Hence, further calibrated monetary policy action is necessary for the current MPC meeting to keep inflation expectations anchored and break the persistence of core inflation while containing second-round effects. I also believe that we should taper the pace of rate hike in view of two considerations: (i) we need to give time for our past policy actions to work through the system; and (ii) it would be premature to pause, lest we are caught off-guard and need to do a catching up later. I, therefore, vote for an increase of 25 basis points in the policy repo rate to 6.50 percent. This order of rate increase provides space to calibrate future monetary policy actions and stances based on evolving macroeconomic conditions”, he added.

Governor said, “Our actions have nudged the policy rate adjusted for inflation to positive territory after a while. Liquidity remains in surplus mode, even as the surplus is moderating. The overall monetary and liquidity conditions, therefore, remain accommodative. In such a scenario, it is necessary to persevere with the stance of withdrawal of accommodation to ensure a decisive process of disinflation. Accordingly, I vote for continuing with the stance of withdrawal of accommodation”.

“There has been some discussion in the public space about the need to give forward guidance on monetary policy actions. As I have stated on several occasions, it would be inadvisable to provide specific guidance when we are in a tightening cycle and when we are experiencing such extreme uncertainty. The only forward guidance that we can provide is that we will remain vigilant, monitor every incoming information and data, and shall act appropriately to maintain price stability in the interest of strengthening medium-term growth”, he further said.

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