Rising inflation may constrain monetary policy committee: Meeting minutes

Rising inflation has complicated the task of India's monetary policy committee and could limit its ability to support growth, its August meeting minutes showed on Thursday, while it also called on the government for more fiscal action.

On Aug. 6, the MPC unanimously decided to hold interest rates steady while keeping its stance accommodative as long as necessary to revive growth and mitigate the impact of Covid-19 while ensuring inflation remains within target.

Despite the dovish tone, the minutes suggest the bank sees little room for rate cuts in the current environment.

"Inflation surprises of recent months are undermining the MPC's actions and stymieing its resolve to do what it takes to revive growth and mitigate the impact of Covid-19 on the economy," deputy governor Michael Patra wrote in the minutes.

Almost all members highlighted the uncertainty on the inflation front and the need for more fiscal measures that would help the economic recovery as the MPC's hands are tied due to its inflation-targeting mandate.

The MPC is mandated to maintain inflation at 4% over the medium term and keep it within a 2% to 6% range at all times. A breach of this band for three straight quarters would require the committee to offer an explanation to the government.

Inflation has remained above this range in the last two quarters.

"Monetary policy is forced into a standstill even when there is space available to persevere with its commitment to reinvigorate growth momentum and alleviate the effects of Covid-19," Patra said.

If inflation stays above the upper tolerance band for one more quarter the committee must by mandate undertake remedial action to head off the build-up of inflation pressures and prevent it from getting generalised, Patra said.

"This should be a crisis that is not wasted. The government must continue to focus on much needed structural reforms. Some fiscal space should be reserved for later outbreaks," MPC member Chetan Ghate wrote.

Almost all members however said that growth is still fragile and that while accurate growth forecasts are not possible at the moment point, the country was likely to see a significant contraction in 2020/21, making it difficult to completely ignore the risks to growth.

The Indian economy is likely to contract this quarter and next, according to a recent Reuters poll.

"Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously," Governor Shaktikanta Das wrote.