The Monetary Policy Committee (MPC) minutes reinforce the wait-and-watch mode. The MPC members highlighted the increased risks emanating from global factors, even as expressed concerns on the durability of domestic growth, thereby reinstating the policy stance. Notably, the members seemed concerned on risks emanating from financial market instability and elevated and sticky core inflation and appeared ready to act swiftly once growth seems on a stronger footing.
Concerns from persisting inflationary pressures
The Minutes highlighted the members’ concerns stemming from varying pace of policy normalization across countries on account of high and persistent inflation, especially in major AEs. Supply-side disruptions globally, and domestic factors such as improvement in the service sector (reflecting pickup in demand), rising fuel costs and revision in mobile tariffs could add further to price pressures, the effects of which could be seen from December 2021, opined Governor Das, Dr Goyal, and Dr Bhide.
Dr Saggar stated that “we need to be eagle-eyed for the pass-through of producer prices to retail levels and be ready to act should the need arise”, and emphasized that if growth improves further, focus would have to shift to inflation, signaling a more hawkish tilt. Dr Patra noted that India’s inflation situation reflected a ‘scissor effect’ with rebound in demand meeting supply bottlenecks. He was, however, optimistic that supply-side disruptions will begin waning starting 2HCY22. Dr Varma also noted that there was increased evidence of inflation becoming persistent in the upper regions of the tolerance band.
MPC wary of financial market instability
With the members agreeing on increased uncertainty from the spread of the Omicron variant, there was also consensus on increased risks from premature policy normalization. Dr Saggar noted that while the momentum towards policy normalization had picked up, “… a third of the activity indicators have yet to cross pre-pandemic levels.” Notably, Dr Patra highlighted that financial market volatility had increased in recent weeks on fears of pivoting policy towards rapid normalization, and differing macroeconomic conditions globally are putting recovery at risk.
Governor Das, however, was of the view that continued policy support was warranted for a “durable, broad-based, and self-sustaining rebound” to make recovery more even across sectors. In line with this, Dr Saggar also called for small moves towards policy normalization and that a tighter policy could be adopted when demand revival was more resilient with lower risks to growth. Similarly, Dr Goyal had clearly stated that the next step in normalizing policy was to decrease the excess durable liquidity itself.
RBI-MPC accelerates stealth normalization process
Even as the December policy seemed considerably dovish, the finer details in the minutes highlight the uncertainties and the policy dilemma facing the MPC. Most MPC members, while referring to the need to support durable growth, consider it necessary to remain vigilant on the risks associated with inflation and financial instability. The recent actions of RBI through 3/4-day VRRR in the week when liquidity was expected to tighten due to advance tax and GST outflows suggest the discomfort and hence the necessity to swiftly normalize the operating target rate towards the repo rate.
The money markets rates have accordingly been drifting higher (overnight: 28 bps and 3M T-Bill: 19 bps respectively since December policy). Kotak Securities said, “We expect the RBI to continue to focus on shorter-tenor VRRR auctions going ahead in lieu of the undersubscribed longer-tenor auctions. This is expected to gravitate the overnight rates closer to repo rate as we approach the February policy. We maintain our call of policy corridor normalization by the April 2022 meeting (reverse repo hike of 20 bps each in February and April).”
