Most members of the monetary policy committee (MPC) argued for front-loading interest rate hikes in view of rapidly rising inflation during the off-cycle monetary policy review earlier this month — the minutes of the meeting published on Wednesday showed.
In early May, the rate setting committee met unscheduled and unanimously decided to hike the repo rate by 40 bps.
This was the first repo rate hike in four years, and an inter-meeting hike in more than a decade.
External member Jayanth Varma clarified that MPC meetings outside the annual calendar are at the sole discretion of the Governor based on his opinion that an additional meeting is required.
“It appears to me that more than 100 basis points of rate increases need to be carried out very soon.
"My preference, therefore, is for a 50 basis points increase in the repo rate in this meeting,” Varma said.
He, however, voted for a 40-bps rate hike along with the other members because 40 bps is not materially different for 50 bps.
“I am thankful to the majority for not making my decision more difficult by choosing a 37.5 basis point hike (exactly mid-way between 25 and 50).
"In view of all this, I vote in favour of increasing the policy repo rate to 4.4 per cent,” Varma said.
Varma has dissented in previous four policies before April as he argued for a reversal of the stance to neutral from accommodative.
Varma said there was delay in policy normalisation by continuing the forward guidance for far too long after the pandemic abated.
“This means that it is now imperative to front-load the rate action to the extent possible,” he said.
“In view of a reasonable recovery and the sharp rise in inflation, which will also raise inflation projections, frontloading of rate hikes is required to prevent the real rate becoming too negative,” Ashima Goyal, external member of MPC, said.
Goyal said the history of past shocks in India showed food and oil price inflation together can give rise to second round effects.
“This is what happened in the 2010s. But so far, pass through to wages is absent and consumer demand is soft,” she said.
Governor Shaktikanta Das who convened the off-cycle meeting said events since the April policy led to a further deterioration in the geo-political situation and as domestic inflation became more broad-based warranting immediate remedial measures.
“The off-cycle meeting held on May 2 and 4, 2022 may be seen in this background,” Das said.
He said the CPI inflation numbers for March caused further concern and that global commodity and food prices touched historic highs which had implications for the domestic price situation.
"Waiting for one month till the June MPC will mean losing that much time while war-related inflationary pressures accentuated.
"Further, it may necessitate a much stronger action in the June MPC, which is avoidable,” Das said.
Deputy Governor Michael Patra said, “…with headline inflation persisting above the upper tolerance band for the third month in a row with signs of second order effects, the approach of reversing the extraordinary accommodation — in terms of both the policy rate and liquidity — that was undertaken in response to the pandemic is, to my mind, the right approach.”
External member Shashanka Bhide said the emerging need for policy response in the context of inflationary pressures was clearly recognised.