‘Monetary policy has to remain extra alert and ready to act’, Shaktikanta Das

Recurring incidences of large and overlapping supply side shocks bring with them the risks of generalisation of inflation impulses, possible loss of monetary policy credibility and de-anchoring of inflation expectations, cautioned RBI Governor Shaktikanta Das.

“Going forward, inflation outlook continues to be beset with uncertainties, especially from adverse weather events, the playout of El Niño conditions, uncertainties in global food and energy prices and volatility in global financial markets.

“Inflation expectations of households – both three months and a year ahead – have, moved together to single digit for the first time since the Covid-19 pandemic,” per Das’ statement at the monetary policy committee (MPC) meeting held from October 4 to 6, 2023.  RBI released minutes of the meeting on Friday.

Underscoring that MPC’s fundamental goal is to align inflation with the 4 per cent target and anchor inflation expectations, the Governor said monetary policy has to remain extra alert and ready to act, if the situation warrants.

Also read: Rates to stay firm. Strong global headwinds to keep rates high: RBI Governor

Inflation undermining growth

MD Patra, Deputy Governor, observed that the fight against inflation in the wake of the war in Ukraine has been arduous and herculean; by comparison, the moderation of inflation from the high reaches to which it had surged in the first quarter of 2022-23 has been grudging and underwhelming.

“The anchoring of inflation expectations is incomplete and muddied by uncertainty, going by the increase in variability of median expectations of households and the underperformance of revenues of businesses relative to their profits.

Also read: India’s path to 4% inflation: RBI’s cautionary tone signals prolonged rate stability

“There is also growing evidence that inflation is undermining growth – people are not increasing discretionary spending in view of high inflation and this is slowing sales growth of corporations,” Patra said.

The Deputy Governor emphasised that inflation prints for September and October will need to be monitored carefully to look out for the moderation that RBI’s projections anticipate.

“If we tame inflation durably, we will prepare the ground for a long innings of strong and stable growth. Our projections anticipate that growth will gather positive momentum from the second quarter onwards.

“Monetary policy can contribute by remaining sufficiently disinflationary without being overly restraining,” he said.

Rules out rate cut

Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, noted that the monetary policy stance rules out a rate cut.

“It allows a rise but that will not be required unless there are second round effects from the repeated supply shocks. So far there are no signs of such pass through. The guidance therefore is that future moves will be data dependent,” she said.

Goyal said while Indian household debt is low by international standards, a sudden rise can be a concern. “It is best to restrain over-enthusiasm in good times and thus avoid a crash. Prudential tightening, such as raising LTV (loan-to-value) ratios or risk weights, would be preferable to raising policy rates more,” she added.

Real repo rate already quite high

Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad, observed that the changes in the outlooks for both inflation and growth are quite modest, and the real repo rate is already quite high.

“I, therefore, support the decision to keep repo rate unchanged. In my view, the real interest rate based on projected inflation is high enough to glide inflation towards the target within a reasonable period,” he said.

As regards the stance, Varma continued to have the same reservations as in the past.

“Successive meetings that promise to withdraw accommodation while actually keeping rates unchanged do not enhance the credibility of the MPC. I would much prefer a stance in which words are consistent with the actions,” he said.

Moreover, at this point of time, the guidance that the market really needs is not about how high the terminal repo rate would be, but about how long the rate would be maintained at a high level.

“It would therefore be useful for the MPC to communicate its intention to keep real interest rates high enough for as long as is necessary to drive projected inflation close to the 4 per cent target on a sustainable basis,” Varma said.