The Reserve Bank of India (RBI) Governor
Shaktikanta Das said that despite some moderation, inflation is
“unacceptably and uncomfortably” high, while resilient domestic
growth gives space to the central bank for policy actions.

“Sustained high inflation, unless addressed
effectively, could result in unanchoring of inflation expectations and their
second-order effects. This necessitates appropriate monetary policy response to
prevent upward drift in inflation from the target rate,” said in the
minutes of the central bank’s monetary policy meeting held earlier this month.

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The sequence of policy measures, Das said, “is
expected to strengthen monetary policy credibility and anchor inflation expectations”.

“Our actions would continue to be calibrated,
measured and nimble depending upon the unfolding dynamics of inflation and
economic activity,” he said.

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The other members of the Monetary Policy Committee
(MPC) – Dr. Shashanka Bhide, Dr. Ashima Goyal, Professor Jayanth R Varma, Dr.
Rajiv Ranjan, and Dr. Michael Debabrata Patra – had expressed similar views,
according to the minutes of the meeting released by the Reserve Bank of India
(RBI) on Friday.

At its meeting from August 3 to 5, MPC decided to
raise the benchmark interest rate by 50 basis points to 5.40% in a bid to curb
inflation.

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According to RBI Deputy Governor Michael Debabrata
Patra, frontloading of monetary policy actions “can keep inflation
expectations firmly anchored, re-align inflation with the target and reduce the
medium-term growth sacrifice as it is timed into the recovery underway.”

He said the global outlook has become increasingly
uncertain and titled by downside risks. Patra flagged global growth concerns
and said the probability of a recession or hard landing has risen to levels
that preceded actual recessions in the past.

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The “elephant in the room” is the
unrelenting strength of the US dollar which has risen by over 8.3% since March
31, 2022, just to set up a numeraire, he said.

MPC member Shashanka Bhide said uncertainty on
inflation pressures in the global environment remains significant. A prolonged
Russia-Ukraine conflict and disruptions in supplies, especially for energy and
food commodities are a major source of uncertainty for price trends.

“The direct impact of supply disruptions, even
if targeted to some geographies, is quickly transmitted elsewhere to meet the
overall demand-supply imbalances. Weakening of many currencies against the US
dollar also imparts inflationary pressures on the domestic economies of the
other countries,” he said in the minutes.

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The resolution of the RBI MPC in the August 3-5
meeting to remain focused on the withdrawal of accommodation confuses than
clarifying the panel’s position, according to member Jayanth Verma.

“Withdrawal of accommodation” cannot refer to the
withdrawal of the pandemic era accommodation. It can only mean withdrawal of the
pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in
February 2019. A plain reading of this resolution would then be that the MPC is
focused on taking the repo rate back to 6.50%, he said. Such an indication of a terminal
repo rate of 6.50% is totally unwarranted in the situation that we are in, he
added.

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Verma called for front-loading policy rate hikes
and said the choice for him was between 50, 60, and 75 basis points as inflation
remained at unacceptably high levels while growth proved resilient.

“The resolution should in my view be
interpreted only as stating that there is a high likelihood of further
front-loaded tightening without restricting the freedom of the MPC to respond
to the changing environment in a data-driven manner,” Varma said.