MPC unanimously decided to keep the borrowing costs unchanged at a record low for the 11th time in a row in a bid to continue supporting economic growth despite inflation edging higher, especially in the wake of the Russia-Ukraine conflict.
All the six members of the RBI's rate-setting panel expressed concern over inflation and Governor Shaktikanta Das stressed that the central bank will have to constantly re-assess the "dynamic and fast-changing situation" and tailor its actions accordingly, as per the minutes of the recent MPC meeting released on Friday.
Das-headed Monetary Policy Committee (MPC), which held its meeting from April 6-8, unanimously decided to keep the borrowing costs unchanged at a record low for the 11th time in a row in a bid to continue supporting economic growth despite inflation edging higher, especially in the wake of the Russia-Ukraine conflict.
The central bank's MPC has six members, including the governor.
Das opined that the current geopolitical situation has led to an upward revision of RBI's inflation projections for 2022-23, and the estimates now point to inflation remaining above the upper tolerance band in the near term even as growth projections have undergone downward revisions.
"The circumstances warrant prioritizing inflation and anchoring of inflation expectations in the sequence of objectives to safeguard macroeconomic and financial stability while being mindful of the ongoing growth recovery," he said, as per the minutes.
Further, Das said there was a need to avoid undue disruptions in the financial markets. Given this delicate balance between inflation and growth, he voted for retaining the repo rate at 4 per cent and maintaining the accommodative stance.
"The situation is dynamic and fast-changing, and we should constantly re-assess the situation and tailor our actions accordingly," he said.
MPC member and RBI Deputy Governor Michael Debabrata Patra opined that in a world in which de-globalization seems imminent, one thing has become globalized and that is the alarm about inflation, according to the minutes.
"With 60 per cent of developed countries facing inflation above 5 per cent -- unheard of since the 1980s -- and more than half of the developing countries experiencing inflation above 7 per cent, the climb in prices is testing societal tolerance levels," he said during the meeting.
While the Reserve Bank of India (RBI) decided to maintain the status quo, it raised the inflation forecast to 5.7 per cent for the current fiscal, up from its 4.5 per cent estimated in February.
RBI also lowered the economic growth forecast to 7.2 per cent for 2022-23 from the previous outlook of 7.8 per cent. This compares to real GDP growth of 8.9 per cent in 2021-22.
RBI Executive Director and MPC Member Mridul K Saggar opined that the Russia-Ukraine war will also have significant detrimental effects on growth.
As per the minutes, he said considering the emergence of a different growth-inflation trade-off, it is best to start withdrawing monetary accommodation through liquidity and rate actions that can begin with raising the floor and normalizing the corridor.
"Monetary policy is not a rocket science but the timing of the launch of the rocket is nevertheless important as monetary policy transmits to its final goals with long and variable lags," he said.
Besides the three RBI officials, Shashanka Bhide, Ashima Goyal, and Jayanth R Varma are three government-appointed members of MPC.
Bhide was of the view that the present situation reflects improving conditions with respect to managing the COVID threat, with the scaled-up vaccinations and an understanding of measures to control any further outbreak of infections.
However, improved demand conditions in the face of fresh global supply constraints may lead to increased inflation affecting the growth recovery itself, he said.
As per the minutes, Goyal opined there was room to cut fuel taxes to mitigate the pass-through of international prices to consumers.
Excise duty could go back to 2019 levels that were high enough to limit oil consumption, even as other efforts to substitute towards renewable sources continue," she said.
Further, she said both fiscal and monetary policy must use the space available to smooth international shocks while taking unavoidable hits.
Varma said that with inflation projected to breach the upper tolerance limit for several months, it is imperative for MPC to communicate its resolve to ensure that inflation remains within the target going forward.
It is also necessary to prepare the markets for the withdrawal of the post pandemic monetary accommodation, he said.
Further, Varma said that in the extremely uncertain situation that prevails today, it is very important for MPC not to issue any forward guidance that would tie its hands.
The next meeting of the MPC is scheduled to be held from June 6-8.