Monetary policy must be nuanced, agile: Das
Mumbai: Stating that there can be no clear roadmap for policy action, RBI Governor Shaktikanta Das said the central bank’s Monetary Policy Committee (MPC) must constantly reassess the situation and adapt the response accordingly as the situation is dynamic.
Minutes from the MPC meeting released on Friday show that there was extensive discussion on the direction of monetary policy. Stating that consumption and investment are still subdued, Das said: “There is also a risk that the ongoing recovery, which is already strained by the current crisis, will be undermined in the event of a rapid tightening of financial conditions. . In these circumstances, policymaking needs to be nuanced and nimble.”
However, members were ready to act given the surge in inflation. “The domestic inflation outlook presented at the February 2022 MPC meeting has undergone a significant upward move since the start of the war on February 24, 2022, with the escalation of the conflict and the ensuing turbulence on the global commodity markets,” Das said. He added that the increase in the price of crude oil and its direct and indirect effects on the CPI contributed about 60% of the upward revision to the projections, the other major contributor being the fallout from global shocks on food prices.
While Das was cautious in talking about the policy response for higher rates, other members hinted at future action. “If, as projections show, inflation persists at elevated levels, the liquidity drain already achieved and projected for the coming year will reduce the risks of excess liquidity stoking inflationary pressures and threatening financial stability. It will also facilitate the transmission of policy impulses across market segments and interest rate structure,” said RBI Deputy Governor Michael Patra.
External member Jayant Varma, who had called for the normalization of the political corridor, said for months that politics should not have a position. “In the extremely uncertain situation that prevails today, it is very important for the MPC not to issue forward guidance which would tie its hands. It is necessary to communicate clearly that at future meetings, the MPC would consider itself entirely free to take any action on policy rates that may be warranted by the data that becomes available.” Varma said he was not getting into the discussion of political action, as previous forward guidance ruled out any such action.
Mridul K Saggar, Deputy Governor, RBI, said global inflation is here to stay and reigns at multi-year highs in many emerging markets. Also in India, inflation which exceeded the upper tolerance threshold is expected to remain elevated in the first quarter of the current fiscal year. “Close monitoring of inflation expectations is necessary. If expectations rise, especially if they become unbalanced and begin to rise even faster than actual inflation, monetary policy should rule expectations to prevent a self-perpetuating inflationary spiral,” Saggar said.
Among the external members, Shashanka Bhide voted to remain dovish while focusing on withdrawing dovishness to ensure inflation stays on target going forward, while supporting growth.
Another outsider, Ashima Goyal, seemed to indicate that RBI was already behind in rate hikes. “Research as well as the Indian experience in the 2000s shows that an early and gradual increase works best. Liquidity rebalancing started early. Now is the time to withdraw the accommodation in times of crisis in terms of movement toward equilibrium or neutral real rates consistent with non-inflationary growth. As long as rates stay below that, it’s still not a tightening regime,” she said.
Minutes from the MPC meeting released on Friday show that there was extensive discussion on the direction of monetary policy. Stating that consumption and investment are still subdued, Das said: “There is also a risk that the ongoing recovery, which is already strained by the current crisis, will be undermined in the event of a rapid tightening of financial conditions. . In these circumstances, policymaking needs to be nuanced and nimble.”
However, members were ready to act given the surge in inflation. “The domestic inflation outlook presented at the February 2022 MPC meeting has undergone a significant upward move since the start of the war on February 24, 2022, with the escalation of the conflict and the ensuing turbulence on the global commodity markets,” Das said. He added that the increase in the price of crude oil and its direct and indirect effects on the CPI contributed about 60% of the upward revision to the projections, the other major contributor being the fallout from global shocks on food prices.
While Das was cautious in talking about the policy response for higher rates, other members hinted at future action. “If, as projections show, inflation persists at elevated levels, the liquidity drain already achieved and projected for the coming year will reduce the risks of excess liquidity stoking inflationary pressures and threatening financial stability. It will also facilitate the transmission of policy impulses across market segments and interest rate structure,” said RBI Deputy Governor Michael Patra.
External member Jayant Varma, who had called for the normalization of the political corridor, said for months that politics should not have a position. “In the extremely uncertain situation that prevails today, it is very important for the MPC not to issue forward guidance which would tie its hands. It is necessary to communicate clearly that at future meetings, the MPC would consider itself entirely free to take any action on policy rates that may be warranted by the data that becomes available.” Varma said he was not getting into the discussion of political action, as previous forward guidance ruled out any such action.
Mridul K Saggar, Deputy Governor, RBI, said global inflation is here to stay and reigns at multi-year highs in many emerging markets. Also in India, inflation which exceeded the upper tolerance threshold is expected to remain elevated in the first quarter of the current fiscal year. “Close monitoring of inflation expectations is necessary. If expectations rise, especially if they become unbalanced and begin to rise even faster than actual inflation, monetary policy should rule expectations to prevent a self-perpetuating inflationary spiral,” Saggar said.
Among the external members, Shashanka Bhide voted to remain dovish while focusing on withdrawing dovishness to ensure inflation stays on target going forward, while supporting growth.
Another outsider, Ashima Goyal, seemed to indicate that RBI was already behind in rate hikes. “Research as well as the Indian experience in the 2000s shows that an early and gradual increase works best. Liquidity rebalancing started early. Now is the time to withdraw the accommodation in times of crisis in terms of movement toward equilibrium or neutral real rates consistent with non-inflationary growth. As long as rates stay below that, it’s still not a tightening regime,” she said.