According to minutes of the MPC meeting on Wednesday, the Reserve Bank of India Monetary Policy Committee decided that the policy rate would be increased by 50 basis points to prevent inflation from corroding economy recovery.
At the Monetary Policy Committee meeting (MPC) held June 6-8, RBI Deputy governor Michael Debabrata Patra stated that “if this inflation is allowed go out of control, it could corrode foundations of recovery that is slowly gaining momentum – empirical evidence clearly shows that inflation above 6.6% in India is unambiguously detrimental for growth.”
Patra said that inflation will discourage investment decisions as businesses worry about the demand for their products being delayed at these higher prices. Depositors worry about negative returns to deposits, and depositors worry about the potential loss of capital. This could lead to capital flight in India which is the second-largest yellow metal importer and only 1 percent of Indian consumption.
Patra noted that inflation will cause exchange rate depreciation, which will increase import inflation, discourage capital flows and trigger large capital exodus.
From June 6-8, 2022, the 36th meeting of Monetary Policy Committee, (MPC), was held. It was constituted under section 45ZB of 1934’s Reserve Bank of India Act.
The meeting was attended to by all members – Shashanka Bidde, Honorary Senior Advisor at National Council of Applied Economic Research (Delhi); Ashima Goyal Emeritus Professor, Indira Guru Institute of Development Research (Mumbai); Jayanth R. Varma Professor, Indian Institute of Management Ahmedabad; Rajiv Ranjan the Executive Director (the officer of Reserve Bank whose nomination was made by the Central Board under Section 45ZB(2)c of the Reserve Bank of India Act 1934); Michael Debabrata Patra, RBI Deputy Governor responsible for monetary policy. Shaktikanta, RBI Governor, chaired the meeting.
MPC reviewed surveys by the Reserve Bank that gauged consumer confidence, household inflation expectations, corporate sector performance and credit conditions. It also looked at the outlook for the infrastructure, services, and industrial sectors and forecasts from professional forecasters.
The MPC also reviewed the staff’s macroeconomic projections as well as alternative scenarios regarding various risks to the outlook.
Based on an assessment of the macroeconomic environment, the Monetary Policy Committee decided that the policy repo rate for the liquidity adjustment facility (LAF), would be increased by 50 basis points to 4.90 percent with immediate effect.
Therefore, the standing deposit facility rate (SDF), has been adjusted to 4.65 percent and the marginal standing rate (MSF), to 5.15 percent.
The MPC decided that it would not abandon accommodation in order to keep inflation within the target range going forward and support growth.
These decisions are in accordance with the medium-term goal for consumer price inflation (CPI) inflation at 4% within a band between +/- 2.5% and supporting growth, according the minutes of the meeting.
All MPC members, Shashianka Bide, Ashima G. Goyal Jayanth R. Varma Rajiv Ranjan Michael Debabrata Patra & Shaktikanta Die – unanimously voted in favor of increasing the policy repo rates by 50 basis point to 4.90%
All members also unanimously agreed to continue focusing on the withdrawal from accommodation in order for inflation to stay within the target moving forward while still supporting growth.
While high inflation remains a major concern, economic activity is still steady and gaining momentum. To effectively manage inflation and to meet inflation expectations, it is time to increase the policy rate. “I vote for a 50-bps increase in repo rate, which is in line with inflation-growth dynamics. It will also help in mitigating second-round effects from adverse supply shocks,” RBI Governor Das declared during his speech at the meeting.
Das said, “This action will reinforce the commitment to price stabilization – our primary mandate” and a precondition for sustainable growth over medium term.