Frontloading of rate increases needed to anchor inflation: MPC

RBI panel’s Varma sees need for more than 100 bps rate increases ‘very soon’

Scene at a local mandi at Nasirpur in Dwarka, India’s retail inflation rose by 7.79% in April. | Photo Credit: KRISHNAN VV

‘Several storms hitting together’, resulting in inflation risks that had become more pronounced and persistent, prompted the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to meet urgently off-cycle and effect a course correction, the minutes of the May 2-4 meeting released by the RBI on Wednesday show.

“As several storms hit together, our monetary policy response should be seen as an important step to steady the ship,” Governor Shaktikanta Das said at the meeting, where the MPC decided to raise the policy repo rate by 40 basis points. “Waiting for one month till the June MPC would mean losing that much time while war related inflationary pressures accentuated. Further, it may necessitate a much stronger action in the June MPC which is avoidable,” Mr. Das noted, explaining the urgency to act.

Emphasising that the MPC’s monetary policy actions were aimed at lowering inflation and anchoring inflation expectations, he said the decisions would help “strengthen the medium-term growth prospects of the economy and protect the purchasing power of the weaker sections of society”.

“Just as we had remained steadfastly vigilant and responded to fragilities in growth caused by the pandemic during the last two years, this time around also we will remain equally resolute and committed to bringing back inflation closer to the target through all possible instruments at our disposal,” Mr. Das had stressed.

Jayanth R. Varma, an external member of the MPC, who has consistently articulated views at divergence with the rest of the six-member panel, remarked that the MPC was “now at liberty to consider the rate increase that it could have done in April itself in the absence of the February forward guidance” which had effectively precluded such action.

Observing that inflation risks had become more pronounced both in magnitude and persistence since April, even as the growth shock appeared to be less severe than he had feared initially, Mr. Varma said, “the need for monetary tightening has become much more acute. Moreover, there is a lot of catching up to do”. 

“It appears to me that more than 100 basis points of rate increases needs to be carried out very soon. My preference therefore is for a 50 basis points increase in the repo rate,” he said, adding that it would be simpler and clearer to move the rate in multiples of 25 bps than to opt for a 40 bps rate increase as the majority were advocating.