RBI MPC Meet: Cumulative Impact Of Interest Rate Hikes Still Unfolding, Said Governor Shaktikanta Das

RBI published the minutes of the MPC's three-day-long meeting in which the committee, defying analysts' predictions, decided to pause the repo rate hike and kept it unchanged at 6.5%.

In a bid to contain inflation, the RBI has already increased the repo rate by a total of 250 basis points since May 2022.

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In the Reserve Bank Of India Monetary Policy Committee meeting earlier this month, Governor Shaktikanta Das proposed a tactical pause as RBI monitors the impact of monetary policy actions over the last year. He said the repo rate hike in six back to back meetings had a cumulative impact and was still unfolding. 

On April 6, the RBI's MPC, defying analysts' predictions, decided to pause the repo rate hike and kept it unchanged at 6.5 per cent. The MPC unanimously decided to keep the policy rate unchanged. The call to pause is for this meeting only, Governor Shaktikanta Das said. 

On Thursday, RBI published the minutes of the MPC's three-day-long meeting. 

According to the MPC minutes, RBI Governor Shaktikanta Das said, "The cumulative impact of our monetary policy actions over the last one year is still unfolding and needs to be monitored closely. Inflation for 2023-24 is projected to soften, but the disinflation toward the target is likely to be slow and protracted. The projected inflation in Q4:2023-24 at 5.2 per cent would still be well above the target."

"Therefore, at this juncture, we have to persevere with our focus on bringing about a durable moderation in inflation and at the same time give ourselves some time to monitor the impact of our past actions. I am, therefore, of the view that we do a tactical pause in this meeting of the MPC," he further said. 

In a bid to contain inflation, the RBI has already increased the repo rate by a total of 250 basis points since May 2022. However, inflation had continued to remain above the RBI's comfort zone of 6 per cent most of the year. 

However, retail inflation in March fell to a 15-month low of 5.66 per cent and came back to the Reserve Bank's comfort level of 6 per cent, as per the government data released this month. 

Minutes showed that RBI Deputy Governor Michael Debabrata Patra said that an ongoing assessment of the macroeconomic outlook should inform a preparedness to re-calibrate monetary policy towards a more restrictive stance with consistent actions, should risks to the inflation trajectory materialise and impede its alignment with the target.

The process of getting inflation back to target could turn out to be gradual and uneven but the mission of monetary policy is to shepherd this process through potential bumps while containing second-round effects and anchoring inflation expectations, he added.

Another MPC member, Jayanth Varma argued that the war against inflation has not yet been won and it would be premature to declare an end to the rate-tightening cycle. 

Jayanth Varma said, "It is clear that the war against inflation has not yet been won, and it would be premature to declare an end to this tightening cycle. There is need for heightened vigilance in the face of the fresh risks that I highlighted earlier in my statement."

“In fact, it is almost axiomatic that monetary action can cool inflation only by suppressing demand. However, policy makers must be vigilant against overshooting the terminal policy rate, and thereby slowing the economy to a greater extent than what is needed to glide inflation to the target,” Varma added.

Ashima Goyal, another MPC member, argued that due to erratic weather and continuing global uncertainties among other reasons, this may not be the end of the rate hikes.

"Because of erratic weather and continuing global uncertainties, and until it is clear that inflation is well on the path to reaching the target, it is necessary to emphasize that this may not be the end of the rate hikes," said Goyal.

The MPC consists of three RBI officials and three external members appointed by the central government.

The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad). 

In Its February meeting, 4 out of 6 MPC members voted to hike the policy rate. The minutes of the February 6-8 monetary policy committee (MPC) meeting released by the RBI showed that 2 of the 3 external members were not in favor of raising the key interest rate this month.