‘RBI opted for off-cycle rate hike to avoid tougher action in June’

MUMBAI: Waiting for the scheduled monetary policy meet in June would have meant losing time and opting for a stronger action, RBI governor Shaktikanta Das told members of the MPC before they unanimously decided to go for an off-cycle hike in interest rate on May 4.
According to the minutes of the Monetary Policy Committee (MPC) meeting held from May 2-4, Das said the off-cycle monetary policy actions were aimed at lowering inflation and anchoring inflation expectations with a view to strengthening the medium-term growth prospects of the economy and protecting the purchasing power of the weaker sections of society.
The timing of the decision of the MPC, which has six members including Das, surprised markets even though rate hike was expected in the wake of spiralling inflation.
The MPC’s external member Jayanth R Varma opined that more than 100 basis points of rate increases needs to be carried out very soon. Though like the rest of the five members, he too had voted in favour of increasing the policy repo rate by 40 basis points to 4.40 per cent, as per the minutes of the meeting released on Wednesday.
Flagging the impact of the ongoing Russia-Ukraine war on commodity prices and resultant inflation, Das said it has become necessary to act through an off-cycle policy meeting.
“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,” he said.
Further, the governor said that as several storms hit together, “our monetary policy response should be seen as an important step to steady the ship”.
Indian as well as global evidence clearly shows that high inflation persistence hurts savings, investment, competitiveness and growth. It has also more pronounced adverse effects on the poorer segments of the population, he said.
“Our monetary policy actions today aimed at lowering inflation and anchoring inflation expectations should thus help to strengthen the medium-term growth prospects of the economy and protect the purchasing power of the weaker sections of society,” he added.
The MPC, headed by Das, after its meeting from May 2-4 had recommended raising the key interest rate (repo) by 40 basis points. The rate was hiked with immediate effect. It was the first hike since August 2018.
MPC member and RBI deputy governor Michael Debabrata Patra said at the meeting that in this milieu, a measured approach and a cool head is warranted.
“Recent incoming data suggest that India’s macro-fundamentals, barring imported food and fuel inflation, are still intact and in sync with the recovery that has been tenaciously making its way through waves of the pandemic,” he said.
Patra also said the geopolitical spillovers have thrust upon India a surge in the momentum of inflation “we can ill afford”.
As long as the geopolitical crisis and retaliatory actions persist, so will inflation, he added.
MPC member and RBI executive director Rajiv Ranjan too said the global macroeconomic and financial environment has turned extremely adverse since February 2022 with the start of the war in Ukraine and is posing significant challenges to real-time macroeconomic assessment and management.
With economic recovery better entrenched than before, it is time to address the concerns on the inflation front, the dynamics of which has been fundamentally altered by the outbreak of the conflict in Europe.
“Though monetary policy may not have a direct influence on exogenous global commodity price shocks brought about by the war, it can play an important role in avoiding the generalisation of inflationary pressures,” he said.
MPC external member Ashima Goyal was of the view that government supply-side action can also reduce future rate rises, output sacrifice and borrowing costs.
Both central and state taxes are buoyant and likely to exceed any rise in subsidy costs because of the Ukraine crisis, giving them space to cut taxes on fuels, she said.
According to her, countercyclical fuel taxes are necessary to prevent a ratchet effect raising inflation, if fuel prices rise much more than they fall because taxes rise when crude oil prices fall but do not fall when prices rise.
Shashanka Bhide, another MPC external member, said given the present assessment of the inflation and economic growth conditions, monetary policy measures to break the inflation dynamics have become necessary.
While the impact of such monetary policy measures may affect growth momentum adversely in the short-term, the overall external conditions also require that domestic inflation pressures are contained quickly, he said.
The next meeting of the MPC is scheduled to be held from June 6-8.