What the minutes of RBI’s off-cycle meeting indicates about economy and inflation

Earlier this month, the Reserve Bank of India raised its benchmark repo rate by 40 basis points, to 4.4% from 4%, in a shock move just a month after keeping interest rates unchanged.

The surprise decision came after an unscheduled meeting of the RBI’s Monetary Policy Committee held during May 2 to 4, following its regular meeting of April 6-8. The decision, the RBI said, was aimed at controlling inflation.

Apart from raising the interest rate, the MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The minutes of the meeting released on Wednesday now explain the urgency behind the RBI’s rate hike. The meeting was attended by all the members: Shashanka Bhide, Ashima Goyal, Jayanth R. Varma, Rajiv Ranjan, RBI deputy governor Michael Debabrata Patra and RBI governor Shaktikanta Das.

So, what was the MPC’s assessment of the Indian economy?

According to the minutes, the MPC felt that domestic economic activity stabilised in March-April with the ebbing of the third wave of COVID-19 and the easing of restrictions. It said that urban demand appears to have maintained expansion but some weakness persists in rural demand. Investment activity seems to be gaining traction, it said.

The MPC noted that merchandise exports recorded double-digit expansion for the fourteenth consecutive month in April. Non-oil non-gold imports also grew robustly on the back of improving domestic demand.

The panel said that overall system liquidity remained in large surplus. Bank credit rose by 11.1% as on April 22 from a year earlier, though India’s foreign exchange reserves declined by US$6.9 billion in 2022-23 (up to April 22) to US$600.4 billion.

What were the MPC’s comments on inflation?

The panel noted that in March, headline CPI inflation surged to 7.0% from 6.1% in February, largely reflecting the impact of geopolitical spillovers. Food inflation increased by 154 basis points to 7.5% and core inflation rose by 54 bps to 6.4%.

It said that the rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world. The IMF projects inflation to increase by 2.6 percentage points to 5.7% in advanced economies in 2022 and by 2.8 percentage points to 8.7% in emerging market and developing economies, the MPC noted.

How did the MPC view the global economy?

The MPC said that since its last meeting in April, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased.

It noted that the International Monetary Fund had revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6%, in a span of less than three months. The World Trade Organization has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0%.

What is the MPC’s outlook on inflation?

The MPC said that heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India and crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory, it said.

The committee felt that core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines. Renewed lockdowns and supply chain disruptions due to resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer.

All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC, the minutes of the latest meeting showed.

What is the MPC’s outlook on economic growth?

The panel noted that the forecast of a normal southwest monsoon brightens the prospects for kharif production. The recovery in contact-intensive services is expected to be sustained, with the ebbing of the third wave and the growing vaccination coverage, it said.

It also said investment activity should get an uplift from robust government capex, improving capacity utilisation, stronger corporate balance sheets and congenial financial conditions.

However, the worsening external environment, elevated commodity prices and persistent supply bottlenecks pose “formidable headwinds”, along with volatility spillovers from monetary policy normalisation in advanced economies.

On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions but it is prudent to continuously monitor the balance of risks, the committee said.

Who all voted for and against the rate hike?

All members of the MPC unanimously voted to increase the policy repo rate by 40 basis points to 4.4%. All members also unanimously voted to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.