Pass-through of fall in commodity prices not clear: RBI MPC's Bhide

'In the past two meetings, the size of the rate increases have come down'

Shashanka Bhide, external member of the Monetary Policy Committee (MPC), voted in favour of a rate hike along with the internal members of the RBI in the latest policy meeting. In an interview with Asit Ranjan Mishra, he said the MPC is aiming to bring down inflation level within the tolerance band in 2023-24. Edited excerpts:

You are now the only external member to vote against a pause. You clearly don’t share the risks to economic growth from over-shooting policy tightening?
 

No, I am a member in favour of an increase in rate (in the last MPC meet). The price rise was significant in many commodities. For me, the issue was core inflation, which continued to be high. Several components of core inflation were above 6 per cent. The rate hike was in the background of the continued inflationary pressures, especially in the sectors and commodities other than food. We are looking to reduce the inflation rate target over the medium term. We are not close to that yet. Growth is certainly an area that will be affected by higher interest rates. But at the same time, the continued high inflation rate is a real concern now.

Since the RBI has raised policy rates cumulatively by 250 basis points and rate transmission takes time, will it not be prudent to pause and allow past policy rate hikes to show its impact on the ground?
 

In the past two meetings, the size of the rate increases has come down. You are right, we have had rate increases since the May meeting. It’s the question of achieving our mandate. We need to see that we are within the tolerance band in 2023-24. To know whether rate increases are required or not, we need to have those trends. Many of the things, especially the international commodity prices, are more favourable. What is less clear is the pass through of many of the decline in the international prices in the domestic market. These two-three things are important on what the policy position would be. After the significant increase in rates since May, we are still not within the tolerance band. So rate decisions will have to be based on how the data looks like.

Though inflation is still not within the band, any further rate hike will not immediately have an impact on the inflation trajectory. Whatever rate hikes have already happened, only those can have an impact on inflation in the next few quarters. From that aspect also, don’t you think any further rate hike may not be needed?
 

That is a concern which is certainly there. The transmission of rate hike on overall price conditions and what happens to the demand conditions due to the rate hike. This trade-off is a concern.  Lower inflation rate is a priority now. The decisions will have to be based on that.

MPC members, including you, have made core inflation a benchmark while the mandate is the headline retail inflation. Why is that?
 

It is not a move away from the mandate. It is simply the fact that unless the core inflation also comes down, it is tough to bring the overall inflation rate in a sustained way closer to our target, even within the tolerance band. Strictly speaking, (the area of concern are) core inflation and to some extent the fuel and light inflation, which is in double digits. 

How much policy tightening of other central banks, especially the US Fed, and possible capital outflow impact MPC’s policy decisions?
 

I don’t think they directly influence rate decisions. But the overall economic trends certainly would have an impact on decisions. For example, the external environment is affected by all that happens — decisions by other central banks, commodity markets, capital flows, and so on. All of these will certainly have an impact on the assessment of the course of the economy. But it’s the expectations of inflation and growth for the economy that are critical.