“While inflation is driven largely by supply-side factors and does not show any signs of overheating of the economy nor of generalisation, it is important to manage inflationary expectations. In view of the continued geopolitical and trade policy uncertainties, I feel that a neutral stance remains appropriate,” Dr. Nagesh Kumar said.
“To realign the inflation trajectory towards the target, and from the real repo rate perspective, a calibrated increase in the repo rate is needed. The duration and magnitude of the rate hike required to meet these objectives would depend on the emerging growth-inflation outlook. The MPC will have to remain vigilant about the pace of inflation generalisation to respond in a timely and effective way. For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates,” Ram Singh said.
“I do not favour shifting the stance from neutral to tightening mode, as it may signal an extended cycle of rate hikes. This, in turn, can neutralise the benefits of growth-supportive monetary and fiscal policies in the recent past. Current inflation is primarily due to supply-side factors, rising fuel, food, and commodity prices, and their effects. The classic signs of economic overheating —such as a wage-price spiral or demand-driven capacity overstretch or abnormal growth in private consumption and capex —are largely absent, he said.
Expectations of significant rate increases can undermine demand not only in interest rate-sensitive sectors such as vehicles, real estate, and discretionary spending, but also drag on recent momentum in private investment. Coming on the heels of stress on the farm sector due to below-normal rains and El Niño, rising input costs and global uncertainty, significant rate hikes would hurt profit margins and the sustainability of capex plans of large and small firms, Ram Singh noted, while not recommending for change of stance.
Other members batted for change of stance.
“The totality of information indicates a strong economic case at this time for tightening monetary policy, to bring inflation closer to the target sooner rather than later and anchor inflation expectations. Given the upside risks to inflation, it is also appropriate to change the stance to calibrated tightening,” another MPC member Saugata Bhattacharya said.
“Going ahead, the trajectory of the policy path would be calibrated based on the evolving macroeconomic developments and emerging inflation prints. Given the present global and domestic circumstances, rate cuts are not an option in the near term,” Indranil Bhattacharyya said.
Therefore, I feel it is also appropriate to change the stance from neutral to calibrated tightening. While the neutral stance is consistent with all three policy options (cut, hike and pause), calibrated tightening conveys an unequivocally clear message that rate hikes or pause are the only options in the near term, depending on the evolving outlook. Besides signalling, this would also reaffirm our commitment to price stability as the primary objective of monetary policy, he said.
“Inflationary pressures are mounting around the world, driven by high fuel and commodity prices. Domestically, weather-related adversities and global oil and commodity prices may continue to put upward pressure on headline inflation,” RBI Deputy Governor Poonam Gupta said.
At some point, a larger pass-through of input costs to output prices may materialise. Under these circumstances, it is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored. The pace, extent, and duration of such actions would depend on the incoming data on inflation, its diffusion, and evidence of second-round effects, she said while proposing to change the stance to calibrated tightening.
“As regards supply side inflation requiring a monetary policy response, it is pertinent to mention that monetary policy primarily acts by curtailing second round effects (wage expectations and firm level pricing behaviour) of a supply shock. It is difficult to distinguish between the second-round effects and the indirect impact of supply side pressures (in production cost through energy and other inputs) as both are present in core inflation,” RBI Governor Sanjay Malhotra said.
“There are risks of demand side pressures in view of the growth in monetary and credit aggregates. Considering the growth-inflation dynamics, I consider it appropriate to recalibrate the policy rate,” he said.
“The duration and extent of the rate hiking cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the broadening of price pressures, second round effects of the supply shock, and the impact of demand impulses. Nevertheless, I feel it is appropriate to change the stance to calibrated tightening, essentially signalling that rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving circumstances and the outlook,” Malhotra said.