India's central bank has no choice but to raise interest rates to keep a lid on inflation expectations as supply-side measures will take time to bring down prices, Reserve Bank of India Deputy Governor Michael Patra wrote in the latest MPC minutes.
India's monetary policy committee (MPC) raised rates by 50 basis points earlier this month, after a 40-bps increase in May, to prevent growing inflationary pressure from becoming broad-based.
"To gain time for supply to respond, the blunt instrument of monetary policy has to be deployed – there is no other recourse at this juncture," Patra said in his written minutes released on Wednesday.
"The fact that inflation remains elevated and is broadening indicates that there is some demand that is able to afford these high prices, perhaps due to revenge spending in a pandemic stressed response," he added.
Retail inflation eased marginally in May, after touching an eight-year high of 7.79% in April, but remained above the central bank's tolerance band for a fifth month in a row.
"The objective should be to take the repo rate to a height that is at least above the four quarters ahead forecast of inflation, knowing that monetary policy works with lags," Patra said.
Most members agreed on the need to raise the repo rate but there were concerns expressed over the impact on growth.
"It may be important for the government – both centre and states – to successfully complete their budgeted capex plans and work through their counter-cyclical policy levers to ensure a soft-landing for the economy amidst monetary tightening to rein in inflation," RBI executive director and MPC member Rajiv Ranjan wrote.
Aditi Nayar, chief economist at rating agency ICRA said the minutes suggest the MPC members differ in how concerned they are about future inflation outcomes, how to support growth and in their outlook for the peak repo rate.
"We maintain our view that after additional repo rate hikes of 60 bps over the next two reviews, the MPC will pause to assess the impact of monetary tightening on growth," Nayar said.
Patra said inflation will fall back to below 6% by the fourth quarter of 2022/23 and should moderate to 4% in 2023/24.
"If headline inflation starts moving down in the second half of the year, the objective of taking the policy rate above the level of future inflation will be achieved sooner than later, providing space to pause and reconfigure," he added.