MPC stresses need for aligning to the 4 per cent target on a durable basis

Aligning inflation to the 4 percent target on a durable basis is the prime concern for the monetary policy committee (MPC) members. Even though inflation is reined in, concerns over food inflation are not abated and at the same time strong growth indicators give a policy space to pause rates for some more time.

Except for external member Jayanth Varma who voted for a change in stance from withdrawal of accommodation to neutral, all voted for a pause in policy rate to 6.5 percent and continued with the stance of ` withdrawal of accoommodation”.

Headline consumer inflation has been steadily falling since July 2023 after touching a peak of 7.6 percent and is now closer to the target of 4 percent at 4.8 percent in March. But the MPC needs to be convinced that the slide continues ona durable basis. “ The gains in disinflation achieved over last two years have to be preserved and taken forward towards aligning the headline inflation to the 4 per cent target on a durable basis” said RBI governor Shaktikanta Das in his minutes.

“ The MPC minutes showed that members who have been hawkish likely dialed up their hawkishness a notch, advocating patience on inflation and uncertainties amid robust growth” said Shreya Sodhani, regional economist, Barclays . “ With the MPC seeing no urgency to cut rates, we doubt the RBI will front-run the Fed in pivoting. We therefore now expect rate cuts from Q4’ 24”

Though real interest rates are higher, it appears lesser of a worry at present as the economy is doing well. Corporate profits are high and growth is strong. Growth is strong averaging over 8 percent in the first three quarters. Also exports and rural consumption are recovering. Besides, credit growth continues to be robust.

“ The slight slackening in momentum, especially in categories with sharp growth, is desirable since credit spikes create risk” said external member Ashima Goyal. “ India’s relatively low credit/GDP ratio has to rise, but it is best if this happens gradually so that it is sustainable.”

Core sustaining near target inflation and average headline below 5 percent implies a credible approach to target, according to Goyal.

“ In the current situation of many types of uncertainty, however, maintaining stability must have priority. Therefore, I continue to vote for a pause in the repo rate and for an unchanged stance” Goyal said.

The minute which were written prior to the latest escalated tension in west Asia is wery of the global factos splaying on domestic inflation. “ Some global food prices are firming up in an environment of rising input costs and supply chain pressures” said deputy governor, Michael Patra. “ The headroom provided by the steady core disinflation and fuel price deflation does not assure a faster alignment of the headline with the target”.

The only dissent was on stance by external member Jayanth Varma. “ This unwarrantedly high real rate imposes significant costs on the economy because of the short run Phillips curve. The fact that economic growth in 2024-25 is projected to slow by over half a percent relative to 2023-24 is a reminder that high interest rates entail a growth sacrifice” said Varma. “ Monetary policy should try to reduce this sacrifice while ensuring that inflation remains within the band and glides towards the target”.