MPC continued forward guidance for too long: MPC member Jayanth Varma

On May 4, the Reserve Bank of India (RBI) Governor Shaktikanta Das announced that the MPC had unanimously approved raising benchmark repo rates by 40 bps as it flagged “risks to the near-term inflation outlook’ owing to the war between Russia & Ukraine & other external developments.

“Whatever symbolic or psychological benefit there may be from keeping the hike below 50 basis points is outweighed by the simplicity and clarity of moving in round multiples of 25 basis points. Also reducing the hike by 10 basis points now would require an extra 10 basis point hike at some point,” Varma said.

“It appears to me that more than 100 basis points of rate increases need to be carried out very soon.” Varma preferred a hike of 50 bps in the May 2-4 meet. “The majority of the MPC is in favour of 40 basis points for reasons which are not very clear to me,” Varma commented in the MPC minutes.

The headline CPI inflation in April stood at an 8-year high of 7.8% on an annual basis, pipping analyst forecasts on account of higher food and fuel and light inflation. While food inflation came in at a 17-month high of 8.4% YoY, fuel and light inflation stood at 10.8% against 7.5% YoY in the month before.

The reversal of the ‘extraordinary accommodation’ by the MPC in the current circumstances was the right move, as per Dr. Michael Debabrata Patra.

“When it is done, we will have reached a stage of neutral accommodation – in contrast to extraordinary pandemic time accommodation – from where the next stage responses can be calibrated,” he said.

“Going ahead, we should keep our focus on withdrawal of accommodation to ensure that inflation remains within the target while supporting growth. I, therefore, vote for maintaining the status quo on the stance as in the April policy,” Governor Das said.

MPC member Varma in the minutes of a previous meeting had said that it is important for the panel to not issue any forward guidance that would tie its hands as the situation is uncertain. In the minutes of the May meeting, Varma pointed out that despite this, most of the analyst commentary on the April meeting seemed to interpret the phrase “remain accommodative” as a stance.

“I hope that this time around, the MPC’s intent will be more clearly understood, but if that does not happen, the MPC must consider rephrasing this resolution. It would not be wise for the MPC to persist with language that is pedantically correct, but falls short in communicative efficacy,” he said.