Prices unacceptably, uncomfortably high, MPC noted while raising rate

Indian consumer prices continue to remain "unacceptably and uncomfortably" high after hitting a recent peak in April, said members of the central bank's monetary policy committee (MPC), which differed on the future trajectory on the cost of funds and terminal policy rates while unanimously acknowledging potential external risks to inflation.

"Although 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 was cited as saying in the minutes of the MPC meeting published Friday. "Significant uncertainties remain on account of adverse global spill-overs coming from simmering geopolitical tensions, volatile global commodity prices and financial markets."

To be sure, front-loaded increases in the cost of funds and moderating inflation suggest policy rates are moving closer to desired levels, leaving limited scope for further tightening in the upcoming policy reviews, Barclays chief economist Rahul Bajoria said.


"We continue to expect the terminal rate in the current cycle to be 5.90% and (that) to be achieved by the December policy review," Bajoria said, referring to the likely endpoint for the cost of funds as the RBI remains focused on withdrawing policy accommodation.

Dissent Note on Withdrawal of Accommodation
External MPC member Jayanth R Varma dissented on the resolution that said the panel would remain focused on withdrawal of accommodation while seeking to achieve simultaneous goals of restraining inflation and underpinning growth.

Terminal Rates

"This statement confuses more than it clarifies. Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, 'withdrawal of accommodation' cannot refer to the withdrawal of the pandemic-era accommodation," Varma was cited as saying in the minutes. "It can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in February 2019. A plain reading of this resolution would then be that the MPC is focused on taking the repo rate back to 6.50%." Upfront rate increases since early May might obviate the need, however, for subsequent increases in policy rates, unless inflation springs a surprise. "The frontloading of policy actions is expected to strengthen monetary policy credibility and temper the need for aggressive rate hikes in future," said Rajiv Ranjan, an internal member of the panel. The MPC decided early August to raise the cost of funds by another 50 basis points to 5.40% in a unanimous rate action that also acknowledged further inflation risks emanating from global spill-overs. One basis point is 0.01%.

Enterprise Surveys conducted by the central bank in May-June 2022 found that a majority of the firms in all the major sectors of the economy-manufacturing, services and infrastructure - expect cost pressures to continue through the current financial year. Consequently, product prices are also expected to increase, the MPC said.

Inflation Risks

Furthermore, Deputy Governor MD Patra said that risks to the trajectory of inflation, in the form of currency depreciation, seasonal pressures and uneven progress of the monsoons, could upend the moderation in momentum recently recorded. Inflation, measured by consumer price index (CPI), was at 6.71% in July as against its peak of 7.79% seen in April. The central bank projected inflation at 6.7% in FY23, with the gauge expected at 7.1% in the second quarter before eventually easing to 6.4% in the third quarter and 5.8% in the fourth. "Sustained high inflation, unless addressed effectively, could result in unanchoring of inflationary expectations and their second-order effects. This necessitates appropriate monetary policy response to prevent upward drift in inflation from the target rate," Governor Das said.

The central bank is mandated to keep consumer inflation at 4%, with a 2% margin either side of the target.

While external member Ashima Goyal said the real rate is now near neutral, another external member Shashank Bhide said that pass-through of higher input prices is still incomplete. "The easing of global prices in the case of energy and other raw materials may soften the prices in the non-food sectors, although there may still be pressures from the incomplete pass-through of the higher input prices that prevailed," said Shashanka Bhide, external member of the rate-setting panel.