Reserve Bank of India
--The minutes of December Monetary Policy Committee (MPC) meeting highlighted the growing split among members regarding priorities of inflation over growth.
Governor Shaktikanta Das and Deputy Governor Dr Michael Debabrata Patra highlighted the persistence of elevated core inflation levels with Governor Das stating that "there is no room for complacency and the battle against inflation is not over". Dr Patra called for a "resolute monetary policy to quell it" while also pointing out that the effect of monetary policy actions taken so far can "at best" contain inflation in the range of 5-6 per cent over the year ahead. It is despite the fact that a few members retain hawkish bias on inflation.
On the other hand, Dr Ranjan noted that monetary policy could be 'calibrated to a lesser order' with the inflation trajectory panning out broadly along anticipated lines and also, considering the ongoing pass-through of earlier monetary policy actions and the evolving growth-inflation dynamics.
A few diverged on the policy reaction to the same. Dr Patra and Dr Ranjan asserted that inflation expectation could get unmoored and the second-round effect would imply a higher output sacrifice ratio later. In contrast, Prof Goyal believed India has limited evidence of demand-led inflation and supply components of core are easing. Prof Varma argued that the current policy rate is sufficient to glide inflation back to the target and growth may incrementally get more weightage in global policy reaction functions ahead.
Analysts are closely watching consistent global policy repricing, global pace of inflation evolution, and how the impending recession will shape developing market central bank's policies, which could have implications on India. Besides, the inflation outlook is fraught with uncertainty.
Emkay reinstates the RBI may not turn too restrictive, implying hikes of not more than 25 bps ahead. However, we reckon the situation is fluid and might require frequent adjustments in policy assessments ahead.
The extent of inflation concerns seemed to be a tad varying. Both the doves, Prof Varma and Prof Goyal, argued the Brent assumption of $100/bbl is debatable while forecasting the inflation ahead. Prof Varma asserted global inflation seems to have peaked and is now probably heading lower, while the producers' pricing power and consequently the profitability has eroded dramatically. Prof Goyal argued Indian supply chain pressures have been easing, business inflation expectations are anchored, and supply disruptions in core inflation are now correcting. Dr Patra and Dr Ranjan believed the stickiness of core inflation and sustained high inflation could unmoor inflation expectations and lead to second-round effects. Dr Patra would need to see a fall in "series of monthly inflation readings" to change his stance – unlikely by February meeting. Governor Das agreed with the view, suggesting a pause at this juncture would be premature. Four of the six members also highlighted risk to growth, with a few cautioning against a high sacrifice ratio due to increased rates. One can only hope if RBI tames inflation in time.
