After an unscheduled meeting of the rate-setting panel, Reserve Bank of India Governor Shaktikant Das announced a 40-basis-point increase in the repo rate.
In the minutes of the May 2-4 meeting published on Wednesday, Verma said that in view of the rising inflation risk, he felt that a rate hike of more than 100 basis points was needed soon and so he made a choice. 50-bps increase.
“The reason why most of the MPCs are in favor of 40 basis points is not very clear to me. Keeping a hike below 50 basis points outweighs the simplicity and clarity of having a round multiplication of 25 basis points, ”read his statement in minutes.
Verma, a professor at the Indian Institute of Management, Ahmedabad, said that an additional 10-basis-point rate increase would be needed at some point to reduce the rate of 10 basis points growth at the moment – perhaps later, as soon as the minutes showed
The MPC member, however, said in the minutes that he did not disagree because the optimal rate increase is not something that can be calculated with mathematical accuracy.
“I am grateful to the majority for not making my decision any more difficult by choosing a 37.5 basis point increase (just between 25 and 50). In light of all this, I am in favor of raising the policy repo rate to 4.40 percent. ”
Verma has in the past disagreed with other members of the rate-setting panel on the position of monetary policy.
He mentioned in his statement in April that; He said the main reason for not taking immediate action on the policy rate at that time was the forward guidelines given at the February meeting, which effectively reversed such a move.
In its February policy statement, the MPC reaffirmed that it has decided to continue with a consistent position for as long as necessary to revive and sustain growth on a sustainable basis and continue to reduce the impact of COVID-19 on the economy. Inflation remains within the target range.
As the risk of inflation rose sharply after the Ukraine war, the MPC dropped its progress guidelines in April, saying it had decided to remain tolerant while focusing on housing withdrawal.
“This (May 2-4) meeting is taking place almost a month after the April meeting, and the MPC now has the freedom to consider the rate hike that would have been possible in April in the absence of February Forward Guidance.”
Still standard post hike
Despite raising the MPC repo rate by 40 basis points, monetary policy is extremely tolerant, Verma said in the minutes.
According to him, if the actual policy rate is measured by subtracting the print of the latest inflation from the nominal rate, the actual policy rate after the May 2-4 meeting was actually lower than after the April meeting due to the increase. In inflation
“Of course, it makes more sense to calculate the actual policy rate by subtracting the forecast inflation rate 3-4 quarters ago, but even if one does, it is clear that the actual policy rate is going to be sharply negative, and therefore a higher fit.”
The MPC member said much needed to be done for the hike because the panel had appropriately prioritized the increase in epidemic height in 2020 and 2021 but delayed the normalization of policy after the epidemic subsided.
Verma hopes that after the MPC rate hike in May, the intention of the rate-setting panel will be more clearly understood.
According to him, following the April policy statement, most analysts interpreted the phrase “maintain permission” as a position despite the decision to omit the word stance.
In Verma’s minutes, he said that if the MPC’s intentions were not clearly understood after the May meeting, the panel would have to reconsider the resolution.
“It would not be wise for the MPC to retain language that is academically correct, but falls short in terms of communication effectiveness.”
Resolutions in both the April and May statements state that the MPC has decided to remain tolerant while focusing on housing withdrawals in order to ensure that inflation stays within the target, supporting growth.