MPC Minutes: The Doves Have It. For Now.

A majority of India's Monetary Policy Committee remained focused on growth, while taking comfort from the recent decline in headline inflation.

Still, at least two committee members—JR Varma and Mridul Saggar—called for steps towards normalising policy, by adjusting the cost and availability of liquidity. A third member, Michael Patra, while supporting a continuation of the current policy stance cautioned that inflation is being hit by repeated shocks and second round effects of this must be watched. Even Reserve Bank of India Governor Shaktikanta Das, while remaining growth-focused, chose to reiterate the committee's focus on bringing down inflation to the 4% mid-point of the MPC's 4 (+/-2%) target.

Das continued to bat for growth, arguing that the recovery is delicately poised and yet to take the firm route. In light of this, continued monetary policy support is required, he said.

Food inflation has eased, helped by seasonal factors and supply-side measures. On the flip side, volatile crude oil prices raise the risk of spillover of high transportation cost into retail prices of goods and services, Das acknowledged. On balance though, the outlook on inflation has improved and inflation projection for 2021-22 has been revised downward by 40 basis points to 5.3%, he said.

The MPC's call to stay focused on the medium term has helped moderate undue expectations of a possible reversal of the monetary policy stance, he added.

"With the outlook overcast by several uncertainties including the fact that the pandemic is far from over, we need to ensure that the nascent revival of economic activity shows signs of durability and sustainability," he said.

In a subtle shift amid concerns around the RBI diluting the inflation targeting mandate, Das, however, chose to reiterate the commitment to bring inflation down to 4%.

"We remain laser-focused to bring back the CPI inflation to 4% over a period of time in a non-disruptive manner," he said.

RBI Deputy Governor Michael Patra, while cautioning of continued to shocks to inflation, said he's awaiting evidence of "demand-led inflation". Until then accommodative monetary policy and congenial financial conditions are warranted.

Assessment of inflation has been "happily overtaken" by actual outcomes in the form of a decline in food inflation, Patra said, while acknowledging continued upside risks to prices.

Inflation, however, is being buffeted by repeated shocks that have taken fuel inflation to an all-time high and turned core inflation persistent, with risks to the upside, he said.

Alongside concerns on inflation, worries on growth persist.

Domestic macroeconomic configurations are improving but the risks from global developments are rising and warrant a close watch as they could stifle the recovery that is underway in India, Patra said.

"In this milieu, I vote to maintain the policy rate and the accommodative stance of policy unchanged, awaiting stronger evidence on demand-led inflationary pressures. Until then, congenial financial conditions need to be in place."

Committee member and RBI executive director Mridul Saggar, who has been among the more cautious committee members, argued that amid a morphing economic scenario, it's best that the MPC and the RBI remain data dependent.

Saggar said the central bank needs to reinforce its commitment to the assigned inflation target. "The central bank needs to remain committed to goal dependence and instrument independence as it has a statutory foundation and is also consistent with general worldwide practice."

Comments made by Patra have suggested that the central bank intends to follow a glide path back to 4% inflation to reduce the growth sacrifice.

According to Saggar, it's now time to focus on risks to both inflation and growth and calibrate policies as the situation evolves. Considerable uncertainty about output gap in pandemic times remains, he said. "In my judgement, if no new disruptions to growth emerge, output gap will close sometime in 2022-23..."

As the output gap closes, monetary policy should start to gradually reposition to lowering underlying inflation and inflation expectations next year, he argued. This is especially important if inflation edges up from the energy and services side amid sticky goods core inflation.

Saggar also cautioned against taking a view that inflation expectation will not feed into realised inflation. "In my view, introducing such new paradigms in monetary policy is playing with fire and carry dangers that central banks will lose control over inflation as the economies recover."

JR Varma, the only committee member who voted for a reversal of the accommodative stance and a hike in the reverse repo rate, continued to point to inflation pressures and the need for the committee to reiterate its commitment to the 4% inflation target.

The Covid-19 pandemic has mutated into a human tragedy rather than an economic crisis, and monetary policy is not the right instrument to deal with this, Varma said. "Second, the ill effects of the pandemic are now concentrated in narrow pockets of the economy, and monetary policy is much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy."

Varma said inflationary pressures are beginning to show signs of greater persistence than anticipated earlier. Alongside existing risks, the move towards green energy and risks emerging from China need to be monitored.