Bombay:
India’s central bank cannot afford to prematurely interrupt its rate-tightening cycle as inflation remains above its upper tolerance range and core inflation remains sharply elevated, a majority of members of the monetary policy committee said.
“A premature pause in monetary policy would be a costly policy mistake at this point,” Governor Shaktikanta Das wrote in minutes of the policy meeting released today by the Reserve Bank of India.
“Given the uncertain outlook, this could lead to a situation where we can aim to catch up with stronger policy actions in the next meetings to avert the accentuated inflationary pressures.”
The RBI’s key policy rate was raised by 35 basis points earlier in December to 6.25%, the highest level in more than three years and the fifth consecutive hike to stave off high inflation.
The MPC is mandated to bring retail inflation back to 4% over the medium term while staying within the target range of 2%-6%.
It fell below the upper tolerance level for the first time this year in November, to 5.88%, amid a softer rise in food prices, surprising economists, and some now expecting a pause in rate hikes.
“Inflation in India remains unreasonably high, sustained and broad-based, despite a reluctant decline in October, solely due to favorable base effects,” wrote Michael Patra, RBI deputy governor responsible for monetary policy.
“Core inflation remains unyielding and diffuse, with price momentum rising as it tests the upper tolerance band on itself, warranting determined monetary policy to suppress it,” he added.
Patra said further accommodation withdrawals were warranted to rebalance aggregate demand with supply conditions and bring inflation first back into the tolerance band and then in line with target.
He said the MPC needs to see a decisive drop in inflation over a series of monthly readings before it changes its position, which would otherwise be premature.
However, not all members agreed with these views. Outside members Jayant Varma and Ashima Goyal voted against the decision to stick to the “withdrawal from accommodation” stance, saying risks to economic growth increased while inflation showed signs of abating.
“Economic growth is now extremely fragile and certainly not robust enough to withstand excessive monetary tightening,” Varma wrote.
Goyal said it was time to move to a neutral stance, where data-based movement could be in any direction you wanted, as new information affected forward projections.
“Following early rate hikes since May 2022, there is now a strong case to ease off the accelerator while keeping a close eye on the inflation trajectory,” wrote Rajiv Ranjan, RBI executive director and MPC member.
“Any change of stance at this stage could be interpreted as weakening our resolve to fight the threat of inflation and will hamper the transmission of monetary policy.”
(Except for the headline, this story has not been edited by DailyExpertNews staff and is being published from a syndicated feed.)
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