Both monetary and fiscal support, the MPC believes, are necessary to ensure that the lawsuit is not a victim of the pandemic, the minutes of the committee meeting held earlier this month showed.
Consumer inflation exceeded the upper band of the central bank’s tolerance threshold in May. However, the MPC voted in favor of keeping the prevailing repo rate at 4% and continuing a supportive stance, for as long as necessary, to fuel a fragile economic recovery.
Fiscal measures, in addition to monetary support, could help achieve the dual objective of reducing inflation and sustaining demand.
“Active and timely policy measures on the supply side with regard to gasoline and diesel, edible oil and legumes, among others, would be essential to achieve a lasting softening of price pressures,” said the governor of the Reserve Bank of India (RBI), Shaktikanta Das at the MPC meeting.
To be sure, bond yields have risen after the RBI’s status quo on official rates despite mounting concerns about inflation.
“Retail inflation is not yet predominantly driven by demand, and accepting the sacrifice of production at this stage may not be the best policy option,” RBI Executive Director Mridul Sagar said at the MPC meeting.
The Indian economy is expected to expand at a slower pace than described above, with the MPC reducing growth projections for FY22 to 9.5% from 10.5%. To cool prices and keep demand resilient, the focus must be on removing supply bottlenecks.
Committee members believe the price increase is due to supply-side constraints brought on by restrictions on mobility and business operations in the wake of the second wave of Covid.
These pressures should ease once economic activity returns to normal, according to the MPC minutes. “The current prevailing view is that global price pressures are temporary and are expected to ease as supply chain disruptions and congestion are overcome,” said Ashima Goyal, external fellow and professor at IGIDR.
The recent initiative by a group of ministers to monitor supplies is seen as a welcome step by the MPC.
“(This) must be accompanied by the proactive actions necessary to prevent the costs of imported inputs from adding to inflationary pressures,” said RBI Deputy Governor Michael Patra.
As more states lift the locks, prices are expected to drop.
“Alleviating price pressures will require a more efficient operation of the commercial and logistics infrastructure, supported by the easing of the movement,” said outside member Shashank Bhide, senior adviser to NCAER.