The Reserve Bank raised the benchmark policy repo rate, the rate at which it lends to banks by 50 basis points to 4.9 percent in its June policy statement as consumer inflation has been consistently above the upper band of the mandated target of 2-6 per cent giving priority to price stability even as growth impulses still need to be strengthened.
“If this inflation is allowed to go out of hand, it could corrode the foundations of the recovery that is gradually gaining traction – empirical evidence shows that inflation above 6 per cent in India is unambiguously harmful for growth” said MPC internal member RBI deputy governor Michael Patra.
Factors giving MPC members comfort on the growth outlook include forecast of a normal southwest monsoon, the improvement in employment conditions, steady rise in capacity utilisation and improving non-food credit growth. “This action will reinforce our commitment to price stability – our primary mandate and a pre-requisite for sustainable growth over the medium term” said governor Shaktikanta Das in his minutes.
Changing the course of inflation trajectory to reach targeted level is a priority at this stage for monetary policy although the growth momentum remains modest one, according to external member Shashank Bhide, senior advisor at the National Council of Applied Economic Research.
Between April and June, the MPC raised the policy rate by 90 basis points, but during the same period the RBI’s projection of inflation for the year 2022- 23 has risen by 100 basis points from 5.7% to 6.7%. The real policy rate, therefore, remains more or less where it was in April implying that more rate hikes are needed to get the real policy rate in the positive zone.
” This reminds me of Lewis Carroll’s adage that we must run as fast as we can, just to stay in place, and to go anywhere we must run even faster” said external member Jayant Varma, professor at the Indian Institute of Management, Ahmedabad . “Clearly, more needs to be done in future meetings to bring the real policy rate to a modestly positive level consistent with the emerging inflation and growth dynamics”.
The one-year ahead real rate must not be more negative than -1 percent according to external member Ashima Goyal, professor at the Indira Gandhi Institute of Development Research. ” A fifty or sixty basis point hike would achieve this, while looking through part of the spike in 2022 even as further supply-side movement and clarity on global developments are awaited” she said
Varma made a case for starting to move towards providing projections of the future path of the policy rate by the MPC members. “This would help stabilize long term bond markets and also anchor inflation expectations” he said.
As for the policy stance, the withdrawal of accommodation would be non-disruptive to the process of recovery and would strengthen our ongoing efforts to combat inflation and anchor inflation expectations, according to governor Das.
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