The minutes of the MPC meeting released on Friday reveal that, worried by inflation, one member, J R Varma, had voted to raise the reverse repo, the rate at which banks lend to the RBI. This rate is outside the remit of the MPC, which votes only on the repo rate, the rate at which banks borrow from the RBI.
High domestic price of fuels has triggered worries over stubborn price pressures and there have been demands to reduce taxes to help calm prices of petrol and diesel across the country. Finance minister Nirmala Sitharaman has blamed the burden of UPA-era oil bonds as an obstacle to bringing down fuel prices. She has said that if she did not have the burden to service the oil bonds, she would have been in a position to reduce excise duty on fuel.
Earlier, RBI governor Shaktikanta Das had also said that diesel and petrol prices act as cost-push factors across a range of activities. “It’s not just that passengers who use cars and bikes. High fuel prices also have an impact on the cost of manufacturing, transportation and other aspects,” Das had said in a speech in February.
While retail inflation has shown some signs of moderation in July, wholesale price inflation continued to remain in double digits for the fourth consecutive month. Stubborn inflationary pressures have prompted the RBI to pause its rate-cutting cycle, although it has promised to keep an easy stance to help support growth and nurse the economy to a high growth trajectory.
The minutes reveal that Das made a strong pitch for continuing monetary policy support, citing slack in the economy and inflation being driven by supply-side factors. “Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment,” said Das, making a case for maintaining status quo. “On the whole, the economy still requires support in terms of maintaining congenial financial conditions and fiscal boosters. At such a critical juncture, can we really pull the rug and let the economy tumble?” said Das.
RBI ED Mridul Saggar estimated that the excise duty hike itself may have pushed headline inflation higher by 60-80 basis points (100bps = 1 percentage point), adding to cost-push inflation. Saggar, who along with the others voted for status quo, highlighted the significance of narrative economics in difficult times in producing business cycle movements endogenously.
The views of external members reveal that, while all are keen to support the economy, there is some divergence in respect of their view on inflation. External member Ashima Goyal said that if indirect taxes impart persistence to inflation, it could de-anchor inflation expectation and pose challenges to monetary policy. Pointing out that fuel prices do not fall with international prices, she said, “A persistent rise in Indian fuel prices is at odds with inflation targeting.”
Varma, who argued for withdrawing the accommodative stance, said, “Persistent high inflation means that the monetary accommodation has to be somewhat restrained and, therefore, I argued for raising money market rates towards the repo rate of 4%.”
Barclays economist Rahul Bajoria said that the minutes indicate a shift within the MPC’s narrative and, while the overarching view remains consistently to support the economic recovery, the comfort with inflation dynamics is certainly shifting within the MPC members. He added that there also appears to be a slight divergence visible on inflation persistence between the internal and external members. “But we reckon this gap is unlikely to be sustained, as more inflation prints come through,” he said.