India’s consumer price index-based inflation for the month of September surged to a five-month high of 7.4 per cent. This inflation print officially marks, for the first time, the failure of the RBI MPC to keep inflation within the mandated target range.
Since May this year, the central bank has raised the repo rate by 190 basis points to rein in persistently high inflation. The repo rate is currently at 5.90 per cent. However, the latest inflation data will likely warrant more rate hikes and a shift away from surplus liquidity conditions in the banking system.
The picture on growth is also not rosy. In September, the RBI reduced its FY23 GDP growth forecast to 7 per cent from 7.2 per cent. A number of global institutions, including the IMF and the World Bank, have also lowered the country’s growth forecasts. Since higher interest rates depress aggregate demand in the economy, the extent to which the RBI is willing to go to tame inflation could either support growth or prove to be an impediment.
Against this backdrop, two external members of the MPC have expressed concerns about fragile growth, calling for slower rate hikes. Stating that monetary policy acts with a lag, Professor Jayanth R Varma has called for pausing at a repo rate of 6 per cent.
In the recently released minutes of the September MPC meeting, Varma said that it was dangerous to push the policy well above the neutral rate in an environment where the growth outlook was very fragile and called for a pause after the September hike. Varma said that India had seen unacceptably low levels of growth for longer than it had seen unacceptable levels of inflation, adding that going beyond 6 per cent would compromise the second part of the MPC's mandate -- to support growth. Varma voted against the resolution to remain focused on withdrawal of accommodation to keep inflation within target.
The other MPC member, Ashima Goyal, said that high repo rates imposed heavy costs on India in 2011, 2014 and 2018, leading to a credit and investment slowdown. She added that it was necessary to proceed “very carefully” now that forward-looking real interest rates were positive. Goyal was the only member who voted against a 50 basis point repo rate hike during the September policy. Instead, she had pitched for a 35 basis point hike. She told Business Standard recently that India’s real interest rate should not exceed one per cent. Going by the MPC’s inflation projections, this would imply little room for further rate hikes in the current tightening cycle.
On how the MPC could minimise the impact on growth, while still achieving its inflation target, Goyal said…
Ashima Goyal, Member, RBI Monetary Policy Committee says moderation is a lesson Indian policymakers have learnt. We should not let real rates become too negative or too positive. Not over-reacting key to meeting inflation targets without hurting growth too much. Monetary-fiscal coordination also necessary.
However, there are two sides to this debate
RBI Deputy Governor Michael Patra has said that monetary policy must shift to “red alert” because not only are inflation expectations rising, there are indications that they are becoming unanchored over a one-year-ahead horizon. According to Patra, inflation has become “unyielding and tightly range-bound around the upper tolerance band of the inflation target".
The IMF expects average retail price inflation in India at 6.9 per cent for 2022-23. IMF's India Mission Chief Nada Choueiri too believes that inflation will not come below RBI’s tolerance level in FY23. She said that the IMF projects significant momentum in prices and doesn’t see inflation falling below six per cent in FY23. However, she added that the agency expects it to fall below six per cent in FY24.
 "Is the worst of inflation behind us?")
