Curbing inflation becomes RBI's immediate concern: Minutes of the April RBI MPC meeting released

Concerns about surging inflation amid the hostilities between Russia and Ukraine formed the predominant thread at the monetary policy committee’s (MPC) April meeting, showed the minutes released on Friday. Members of the RBI’s rate-setting panel did acknowledge the geopolitical risks to growth, but chose to prioritise inflation as the more proximate concern.

The MPC turned markedly hawkish in its April policy statement, stating that it would remain accommodative with a focus on the withdrawal of accommodation. Hiking the inflation projection for FY23 to 5.7% from 4.5% and cutting the same for growth to 7.2% from 7.8%, Reserve Bank of India (RBI) governor Shaktikanta Das made it clear that inflation is now a bigger priority than growth.

In the minutes, Das wrote the situation is dynamic and fast changing, and that the MPC should tailor its actions accordingly. “While the risks to domestic growth call for continued accommodative monetary policy, inflationary pressures necessitate monetary policy action. The circumstances warrant prioritising 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.

External member Jayanth Varma highlighted the threat to growth. “While the inflation shock is more clearly and immediately visible, the growth shock cannot be ignored,” Varma said, adding that businesses are becoming reluctant to pass on input cost increases to customers because of concerns about demand compression.

Geopolitical risks appear overwhelming at this juncture and over the foreseeable near term, deputy governor Michael Patra said. The RBI’s strategy to drain out liquidity will help in case high inflation persists, and will also facilitate better transmission of policy impulses across market segments and the interest rate structure. If, on the other hand, risk sentiment improves globally and India receives large volumes of capital flows, the standing deposit facility (SDF) will expand RBI’s ability to undertake seamless sterilisation of the flows.

The RBI on April 8 launched an SDF at 3.75% as a measure aimed at normalising the course of the monetary policy, without actually raising any key rates.

According to Patra, the moot question is whether central banks will be able to deliver the perfect disinflation, the so-called soft landing. “In fact, the view gaining ground is that inflation is at heights that have shattered glass ceilings and the only way to excoriate it is to force a recession – the so called hard landing,” Patra wrote in the minutes.

Executive director Mridul Saggar observed that while it is unclear how long the conflict in Europe will last, the supply chain disruption engendered by it may last for at least a year. “With some ratchet, it will leave permanent effects on price levels, making it necessary for the monetary policy to deal with its second-round effects so that inflation is not elevated as a multi-year phenomenon,” Saggar said.