To Pause Or Not: MPC Minutes Show Continuing Divergence Between Members On Rate Hikes

The minutes of the central bank's Monetary Policy Committee's February meeting showed that members remain divided over a pause in the monetary policy tightening cycle.

While members of the MPC from the RBI remained committed to bringing inflation within the target, external member Jayanth R Varma expressed the need to exercise caution amidst headwinds to growth.

"We must remain unwavering in our commitment to bring down inflation to ensure a decisive and durable moderation in inflation towards the target of 4% over the medium term, while being mindful of growth," RBI Governor Shaktikanta Das said in the minutes.

Hence, further calibrated monetary policy action is necessary in the current MPC meeting to keep inflation expectations anchored and break the persistence of core inflation, while containing second-round effects, Das said.

The MPC should taper the pace of rate hike to give time for past policy actions to work through the system, and because it would be premature to pause.

The order of rate increase provides space to calibrate future monetary policy actions and stance, based on evolving macroeconomic conditions, Das said. "Our actions have nudged the policy rate adjusted for inflation to positive territory after a while," he said.

It would be inadvisable to provide specific guidance amid a tightening cycle and while experiencing extreme uncertainty, said Das.

The monetary policy stance will need to remain disinflationary till inflation is back on target, said Deputy Governor Michael Debabrata Patra.

"Although it seems to have peaked, inflation remains high and, in my view, it is the biggest threat to the macroeconomic outlook," Patra said. Restoration of price stability–as statutorily mandated–will provide a solid foundation for a growth trajectory that actualises India’s potential, he said.

In terms of implications for policy, the MPC has to remain committed to its primary mandate, Patra said.

Moving the policy rate into restrictive territory at a resolute pace has provided headroom to continue to moderate the order of rate increases. "This enables us to assess the impact of our actions carefully, while taking into account the risks around the outlook," Patra said. It also demonstrates the credibility of the MPC's actions through carefully calibrated rate changes without any backtracks, he said.

In the final analysis, the size and timing of rate changes is the best embodiment of the stance, Patra said.

In the second half of 2021-22, monetary policy was complacent about inflation, and we are paying the price for it—in terms of unacceptably high inflation in 2022-23, said MPC member Jayanth R Varma.

"In the second half of 2022-23, monetary policy has become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24," Varma said.

The 25-basis point rate hike, approved by the majority of the MPC, is not warranted in the current context of diminished inflationary expectations and heightened growth concerns, Varma said.

A repo rate of 6.50% very likely overshoots the policy rate needed to achieve price stability, and further tightening is not desirable, he said.

It will be hasty to ease the vigil against inflation, Rajiv Ranjan, executive director at the RBI, said.

The crucial difference between “steady inflation” and “intermittent inflation” is paramount while formulating the policy choice, he said. "The overly large focus on the recent fall in inflation led by “intermittent inflation” may tempt for an untimely pause in monetary policy action, a costly policy error," Ranjan said.

The continuously high core inflation points to the persistence in “steady inflation”, which warrants caution, he said. Thus, it will be premature to pause when there are no definitive signs of slowdown in inflation—particularly core inflation—according to him.

It may be time for more excise tax cuts as multiple supply shocks have imparted persistence to inflation, Ashima Goyal, member of the MPC, said. The large commodity component in India’s consumer price basket and pockets of supply constraints respond better to fiscal action, she said.

Excessive frontloading of rate hikes carries the risk of overshooting that is best avoided, Goyal said.

According to Shashanka Bhide, external member at RBI, said that persistence of core inflation at a high level is a crucial concern at this stage. "It is important to reduce the demand-side pressures on inflation and bring the inflation expectations of the various stakeholders closer to the policy target to sustain the growth momentum."