RBI governor Das says job half done as MPC focuses on 4% inflation target

External members, however, point out high real rate, minutes show

The internal members of the Reserve Bank of India’s (RBI’s) monetary policy committee indicated their resolve to bring inflation to the 4 per cent mark while the external members pointed out high real repo rate, the minutes of the June MPC meeting released on Thursday showed.

“Inflation is now projected to average 5.1 per cent in 2023-24 compared to 6.7 per cent in 2022-23, but this would still be above the target. The disinflation towards the target rate of 4 per cent is likely to be gradual and protracted,” RBI Governor Shaktikanta Das said, adding that inflation uncertainties had not abated since the April MPC review.

Commenting that the full impact of the past rate hikes was still unfolding, Das said the RBI’s job had only been half done with bringing inflation within the band of 2-6 per cent.

“Our fight against inflation is not yet over. We need to undertake a forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if situation so warrants. Beyond this and given the prevailing uncertainties, it is difficult to give any definitive forward guidance about our future course of action in a rate tightening cycle,” he said.

In the June policy, the MPC decided to keep the repo rate unchanged for the second straight meeting, at 6.5 per cent. All the six members of the MPC voted for maintaining the status quo.

Deputy Governor M D Patra said the pause should not be seen as the interest rate cycle having peaked and there could be rate hikes, if needed. “…my vote for maintaining the status quo on the policy rate should be seen as taking a middle stump guard to prepare for a bouncier pitch,” Patra said.

“Holding the rate unchanged should not be interpreted as the interest rate cycle having peaked, but as a period of careful evaluation of a decision on the extent of additional policy tightening, if needed,” he said.

Patra said the pause was only till the next policy and not a prolonged one. “Headline inflation is edging down towards the target, but it is still well above it and the balance of risks suggests that it will go up in coming months before it comes down,” he added.

On the other hand, external member Jayanth Varma said the current level of the repo rate was high enough to keep inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band. He said there were significant risks to both inflation and growth, and the process of bringing inflation under control was still very much work in progress.

He also said it would be premature to declare victory at this point of time based on the inflation prints of just a couple of months.

“In this context, I am not at all comfortable with the self-congratulatory tone of the statement that “the MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band, in line with projections, reflecting the combined impact of monetary tightening and supply augmenting measures,” Varma said.

Varma said based on the forecast inflation for 5.1 per cent for 2023-24, the real repo rate is now almost one and half percentage points.

“In other words, monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy,” he said.

Another external member, Ashima Goyal, also highlighted the issue of real interest rates.

“As expected inflation falls, however, it is important that the real repo rate does not rise too high,” Goyal said.

Citing research, Goyal said the inflation targeting regime had contributed to reducing inflation expectations.

She said commitment to such a regime only involves aligning the nominal repo rate with expected inflation. “Such action, together with the greater impact of official communication in emerging markets, is adequate to bring inflation to target as the effect of shocks dies down. It does not require the nominal repo to be kept higher for longer,” Goyal added.