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Even though monetary policy may not have a direct influence on exogenous global commodity price shocks brought about by the war, it can still play a significant role in preventing inflationary pressures from becoming more widespread. If monetary policy decides to ignore these shocks, and especially if they are not temporary, inflation expectations could become unanchored, which would lead to a persistent upward drift that might not revert to the level it was at before the shock even after the initial shock has completely dissipated. This could have a negative impact on economic growth. In light of the most recent developments regarding inflation, an increase in the repo rate of more than the traditionally accepted 25 basis points would serve to better anchor expectations.
Highlights of the Reserve Bank of India’s Monetary Policy 2022
1. The Monetary Policy Committee (MPC), which was constituted under section 45ZB of the Reserve Bank of India Act, 1934, held its thirty fifth meeting between May 2 and 4, 2022 as an off-cycle meeting to reassess the evolving inflation-growth dynamics and the impact of the developments that occurred after its meeting from April 6-8, 2022. 2. The Reserve Bank of India Act, 1934, established the Monetary Policy Committee (MPC).
2. All of the members were present at the meeting, including Dr. Shashanka Bhide, Honorary Senior Advisor at the National Council of Applied Economic Research in Delhi; Dr. Ashima Goyal, Emeritus Professor at the Indira Gandhi Institute of Development Research in Mumbai; Prof. Jayanth R. Varma, Professor at the Indian Institute of Management in Ahmedabad; and Dr. Rajiv Ranjan, Executive Director (the officer of the Reserve Bank nominated by the Central Board under Section
3. In accordance with the provisions of Section 45ZL of the Reserve Bank of India Act, 1934, the Reserve Bank of India is required to publish, on the fourteenth day following each meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting. These minutes are required to include the following, among other things:
the resolution that was unanimously approved during the meeting of the Monetary Policy Committee;
the vote that was ascribed to each member of the Monetary Policy Committee on the resolution that was passed at the meeting in question; and
the statement that each member of the Monetary Policy Committee is required to make regarding the resolution that was passed in the aforementioned meeting in accordance with subsection (11) of section 45ZI.
4. The Monetary Policy Committee conducted an in-depth review of the staff’s assessment of the macroeconomic environment as well as alternative scenarios based on the various risks to the outlook. The Monetary Policy Committee (MPC) has decided to adopt the resolution that is set out below. This decision was made after extensive discussions on the stance of monetary policy.
5. At the meeting that took place today (May 4, 2022), the Monetary Policy Committee (MPC) made the following decisions after conducting an analysis of the current and developing state of the macroeconomy:
With immediate effect, a 40-basis-point increase was implemented to bring the policy repo rate that is part of the liquidity adjustment facility (LAF) up to 4.40 percent.
As a direct consequence of this, the rate for the standing deposit facility (SDF) has been changed to 4.15 percent, while the rate for the marginal standing facility (MSF) and the Bank Rate have both been changed to 4.65 percent.
The Monetary Policy Committee (MPC)Â
came to the conclusion that it would be in the best interest of the economy to maintain an accommodative stance while shifting its attention to the process of reducing that accommodative stance.
These decisions are in line with the objective of achieving the medium-term target for inflation based on the consumer price index (CPI) of 4% within a band of +/- 2% while simultaneously supporting growth.
6. Following the meeting of the MPC in April 2022, geopolitical tensions and sanctions have continued to cause disruptions, shortages, and rising prices, while downside risks have increased. In a span of less than three months, the International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point, to 3.6 per cent. The World Trade Organisation has revised its forecast for the growth of international commerce in 2022 by 1.7 percentage points, bringing it down to 3.0 percent.
Domestic Economy
7. The domestic economic activity levelled off during the months of March and April as a result of the waning of the third wave of COVID-19 and the relaxation of restrictions. Demand in urban areas appears to have kept pace with expansion, while demand in rural areas continues to show signs of weakness. There is evidence that investment activity is picking up steam. In April, merchandise shipments out of the country increased by a double-digit percentage for the fourteenth month in a row. On the back of robust growth in domestic demand, non-oil and non-gold imports also experienced robust growth.
8. Overall system liquidity remained in large surplus. As of April 22, 2022, there was an increase of 11.1% year over year in bank credit. In the fiscal year 2022-23 (up to April 22), India’s foreign exchange reserves fell to a total of US$ 600.4 billion, representing a decrease of US$ 6.9 billion.
9. The impact of geopolitical spillovers was largely responsible for the significant increase in headline CPI inflation from 6.1 percent in February 2022 to 7.0 percent in March 2022. The overall inflation rate increased to 6.4%, with an increase in food prices of 154 basis points, bringing the total inflation rate to 6.44%. This rapid increase in inflation is taking place within a context in which inflationary pressures are becoming increasingly widespread throughout the world. According to projections made by the International Monetary Fund (IMF), inflation will rise by 2.6 percentage points to reach 5.7% in advanced economies in 2022, while it will rise by 2.8 percentage points to reach 8.7% in emerging market and developing economies.
Conclusion
Despite the fact that the word “stance” was purposefully left out of the statement at the April meeting, the majority of the analyst commentary on the event seemed to take the phrase “remain accommodative” as if it were a position. I have high hopes that this time around, the MPC’s intention will be understood in a more precise manner; however, in the event that this does not occur, the MPC will need to think about rephrasing this resolution. It would not be prudent for the MPC to continue using language that is grammatically impeccable but lacks communicative efficacy because doing so would be counterproductive. However, such a rephrasing is a matter for a future meeting, and at this point in time, I vote in favour of the decision to remain accommodative while focusing on withdrawal of accommodation in order to ensure that inflation remains within the target going forward while supporting growth.
