Saying that inflation remains above the upper tolerance level, Reserve Bank of India (RBI) Governor Shaktikanta Das stated that calibrated monetary policy action is warranted to contain build-up in underlying inflationary pressures.
“Our successive rate actions since May 2022 are working through the system. Considering the elevated inflation levels, especially the stickiness in core inflation, further calibrated monetary policy action is warranted to contain build-up in underlying inflationary pressures, keep inflation expectations anchored, and bring inflation closer to the target rate of 4 per cent over the medium term. This would strengthen the medium-term growth prospects of the Indian economy,” said Das according to the minutes of the latest monetary policy committee (MPC) meeting published recently.
The RBI Governor said that a premature pause in monetary policy action would be a costly policy error at this juncture.
“I am, therefore, of the view that a premature pause in monetary policy action would be a costly policy error at this juncture. Given the uncertain outlook, it may engender a situation where we may find ourselves striving to do a catch-up through stronger policy actions in the subsequent meetings to ward-off accentuated inflationary pressures,” he added.
Das said that in a tightening cycle, especially in a world of high uncertainty, giving out explicit forward guidance on the future path of monetary policy would be counterproductive and this may result in the market and its participants overshooting the actual play out of real conditions.
“In such circumstances, it would be prudent to keep Arjuna’s eye on the evolving inflation dynamics and be ready to act as may be necessary. Monetary policy has to be nimble to address any emerging risk to the price stability, while keeping in mind the objective of growth,” he added.
Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, said that with overall domestic growth showing signs of resilience, the adverse global macroeconomic conditions require that domestic inflation rate is at moderate levels, within the tolerance band of the inflation target on a sustained basis.
“The persistence of core inflation at the upper limit of the tolerance band of the inflation target is of particular concern. Slippage on both growth and inflation objectives together would be a poor outcome. Keeping in view the need to achieve moderation in the inflationary pressures in a sustained manner, continuing with the monetary policy tightening measures is necessary at this stage,” he added.
Michael Debabrata Patra, Deputy Governor in charge of monetary policy, said that the longer inflation stays at current levels, the greater is the danger of expectations getting unhinged, frittering away the moderation reported in the most recent surveys of households, businesses and professional forecasters.
“The risk of inflation eroding purchasing power and weakening consumer spending, especially on discretionary items, is becoming significant. Inflation expectations may also be stalling private investment in capacity creation, as reflected in corporate performance during the second quarter of 2022-23,” he added.