Pause in rate hike at this juncture could be costly policy error: RBI Governor in MPC meeting

At the MPC Meeting this month, Reserve Bank of India (RBI) Governor Shaktikanta Das opined that a premature pause in rate hike at this point could be a costly policy error as the battle against inflation is not over. Minutes of the six-member Monetary Policy Committee (MPC) held between December 5 and 7 revealed that his remark came while voting for 35 basis-point raise in the key lending rate. The RBI released the minutes of the meeting on Wednesday.

Before the December hike in short-term lending rate, the RBI had raised the repo rate by 190 bps in four tranches.

The MPC consists of three external members -- Shashanka Bhide, Ashima Goyal and Jayanth R Varma -- and three RBI officials -- Governor Das, Deputy Governor Michael Debabrata Patra and Executive Director Rajiv Ranjan.

Patra too was of the view that the MPC needs to see a decisive decline in inflation over a series of monthly readings before it shifts stance, which would otherwise be premature.

"Should the incoming information indicate that the recent small easing of inflation is transient rather than the onset of a durable downturn, the MPC should be prepared to respond appropriately in order to achieve the desired inflation objective," the Deputy Governor said while voiting for 35 bps hike in repo to 6.25 per cent along with four other members.

Jayanth R Varma, as per the minutes, had said that he believes that for 35 basis point rate hike approved by the majority of the MPC is not warranted in this context of reduced inflationary pressures and heightened growth concerns, and voted against the resolution to increase the policy repo rate to 6.25 per cent.

While giving his opinion on the overall economic situation, Governor Das said: "I am, therefore, of the view that a premature pause in monetary policy action would be a costly policy error at this juncture. Given the uncertain outlook, it may engender a situation where we may find ourselves striving to do a catch-up through stronger policy actions in the subsequent meetings to ward off accentuated inflationary pressures".

He voted for an increase of 35 basis points in the repo rate - a departure from 50 bps on three previous occasions - which itself "conveys" the signal of an improvement in the inflation outlook, the minutes said.

Das also added that in a tightening cycle, especially in a world of high uncertainty, giving out explicit forward guidance on the future path of monetary policy would be counterproductive.

This may result in the market and its participants overshooting the actual play out of real conditions, he said and added that in such circumstances, it would be prudent to keep Arjuna's eye on the evolving inflation dynamics and be ready to act as may be necessary.

Monetary policy has to be nimble to address any emerging risk to the price stability while keeping in mind the objective of growth, the minutes quoted Das.

The MPC had also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

Executive Director and MPC member Ranjan was of the view any change in stance at this stage could be interpreted as a weakening of the resolve to fight the inflation menace and will impede monetary policy transmission.

The objective, he said, is to ensure a sustained disinflation that brings inflation down within the tolerance band in the short-run and closer to the target over the medium term, while supporting growth.

External member on the rate-setting panel Goyal opined that "it is time to move to a neutral stance", where movement can be data-based in any required direction, as new information affects forward projections. Accordingly, she voted against the part of the resolution on remaining focused on the withdrawal of accommodation.

MPC member Bhide said with overall domestic growth showing signs of resilience, the adverse global macroeconomic conditions require that domestic inflation rate is at moderate levels, within the tolerance band of the inflation target on a sustained basis.

He further said that keeping in view the need to achieve moderation in the inflationary pressures in a sustained manner, continuing with the monetary policy tightening measures is necessary at this stage.

According to Section 45ZL of the Reserve Bank of India Act, 1934, the Reserve Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting.

(With PTI inputs)