“The future trajectory remains clouded with uncertainties due to ongoing geopolitical conflict, the possibility of further supply disruptions, volatile financial market conditions and domestic weather-related factors,” Das said.
“The need of the hour is calibrated monetary policy action, with a clear understanding of the need to support our medium-term growth prospects,” he added.
In its latest policy review concluded on September 30, the RBI left its inflation target for Asia’s third-largest economy unchanged at 6.7% for this fiscal year as it continues to experience pain from food price pressures and amid global risks to more expensive imports.
Inflation is expected to remain high above the central bank’s 6% threshold in the second half of the fiscal year, Das said as he announced the policy decisions.
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The Monetary Policy Committee also raised benchmark rates by 50 basis points to 5.9% in an effort to bring inflation into its comfort zone and in line with aggressive policy tightening by major global central banks. This was the fourth consecutive rate hike and the third increase of half a percentage point. The central bank has raised interest rates by 190bp since May.
MPC members, with the exception of Jayanth R. Varma, had also voted to remain focused on housing withdrawals to ensure inflation remains within target in the future while supporting growth.
In fact, the most recent inflation reading also adds to the pressure on the rate-setting panel to make further steep rate hikes. Indian retail inflation reached a five-month high of 7.41% in September, accelerating from 7% in the previous month, driven by higher food prices. Food inflation rose 8.60% in September, from 7.62% in August.
Retail inflation pressures remained above the RBI’s 6% tolerance ceiling for the third straight quarter and the Mint Street will now have to explain to the government why it has not been brought within the 2-6% mandate and what corrective action needs to be taken. taken it.
Das said the world is in the eye of another storm brewing from aggressive monetary policy tightening and even more aggressive forward guidance from advanced economy (AE) central banks.
Vice Governor Michael Debabrata Patra also noted that current inflation levels around the world have not been seen for decades and thus global policymakers are rushing to raise rates by far more than their own historical experience.
“They are balancing the prospects of a recession against the risks that inflation will remain high and persistent. Given their mandates and the credibility they are working hard on (during the pandemic, they prioritized upswing over price stability, which is not to be blamed, but that they are now preferring to side with hawkishness in their determination to push inflation toward targets for fear of a 1970s redux,” he said.
Patra said monetary policy should play the role of “nominal anchor” for the economy as it charts a new growth trajectory. Emphasis should be placed on being consistent over time in aligning inflation with target. In this context, a front-loading of monetary policy actions could keep inflation expectations firmly anchored and balance demand with supply, easing core inflation pressures, he said.
Shashanka Bhide also echoed the remarks, saying that in order to align inflation expectations with the policy target of inflation, a further increase in policy rates is necessary at this time.
The minutes showed that Shashanka Bhide, Jayanth R. Varma, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das voted to raise the policy repo rate by 50 basis points. However, Ashima Goyal voted to raise the repo rate by 35 basis points.
Goyal said that taking too high Indian repo rates in 2011, 2014 and 2018 came at a high cost. A slowdown in lending and investment has worsened and persisted. So it’s necessary to be very cautious now that forward-looking real interest rates are positive, she said.
She also said it is necessary to monitor the softening of commodity prices. In addition, great uncertainty calls for slow steps and if demand does slow down, less policy tightening is needed.
“If the behavior is forward-looking, frontloading can prevent inflationary pressures. But when the delayed effects of monetary policy are large, as in India, overreaction can be very costly. Harmful effects become apparent too late and are difficult to reverse. Gradual data-based action reduces the chance of an overreaction,” she said.
It’s important for policymakers to stay calm and moderate fear and overreaction, Goyal said.
Meanwhile, Varma, who generally has a different take on the stance, said the MPC should raise the key rate to 6% and then take a break.
“After this hike, a pause is needed as monetary policy operates with delays. It could take 3-4 quarters for the key rate to pass through to the real economy, and the peak effect could last as long as 5-6 quarters,” he said. said.
Varma said it is too early to know if the recent policy measures are sufficient. It may turn out that more monetary tightening is needed, but it makes sense to wait and see if a repo rate of around 6 percent is enough to bring inflation back to target, he added.
“In my view, it is dangerous to push key rates well above neutral rates in an environment where the growth outlook is very fragile,” he added.
However, RBI Governor Das said the Indian economy paints a picture of resilience with macroeconomic and financial stability. Economic activity is steadily improving and high-frequency indicators show continued momentum in business. But global factors are putting pressure on foreign demand, he said.
“Whatever the unfolding scenario, India is expected to be one of the fastest growing major economies in the world… We need to remain vigilant on the inflation front while strengthening our macroeconomic fundamentals.”