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The surge in commodity prices following the Russia-Ukraine war, which puts pressure on inflation, can also hurt growth prospects – the members of the monetary policy committee concurred, meeting minutes released on Friday showed.
“I would like to point out that the hostilities in Europe have imparted an adverse shock not only to inflation, but also to growth,” external member Jayanth Varma said.
“While the inflation shock is more clearly and immediately visible, the growth shock cannot be ignored. There is at least anecdotal evidence that businesses are becoming reluctant to pass on input cost increases to the customers because of concerns about demand compression,” Varma who in agreement with both on rate decision and stance in the April review meeting said. Varma had voted against the stance in the four previous polices before the April.
“I have been arguing for the normalization of the policy corridor for several months now, and I welcome this action which forms part of the MPC statement,” he said.
“The Ukraine war has lasted more than a month, uncertainties continue, oil prices are volatile, supply disruptions will raise inflation but also reduce demand; the continued high impact of Covid-19 in major countries will have similar effects,” another external member Ashima Goyal said.
Analysts said the minutes was less hawkish that the policy announcement on August 8 as the members continue to view growth as a concern.
The steep increase in domestic pump prices of petrol and diesel, after crude oil surged past $100/bbl – for the first time since 2014- made the MPC turned its focus to control inflation. The focus was on reviving growth since the Covid-19 pandemic broke out two years back.
“The minutes seemed a little less focussed on managing inflationary expectations than the policy document itself. However, the March 2022 CPI inflation shock is likely to change that,” said Adity Nayar, chief economist, IRCA. She said there is a high likelihood of a rate hike in the next policy review meeting in June.
Retail inflation rate rose to 6.95 per cent in March from a year ago – a 17 month high – remaining above the tolerance limit of the Reserve Bank of India (RBI) for the third straight month.
RBI governor Shaktikanta Das also cautioned that economic recovery has not been fully achieved and that policy making has to nuanced.
“Emerging from the Omicron wave, India’s economic recovery remains on track, although there are weak spots – private consumption and investment are still subdued and contact-based services, although catching up, are yet to recover fully,” Das said.
“There is also a risk that the ongoing recovery, which is already strained by the current crisis, may get undermined if there is rapid tightening of financial conditions. In these circumstances, policy making has to be nuanced and nimble,” he added.
In the April policy RBI changed its growth projection downward and inflation projection upward. GDP growth forecast was revised to 7.2 per cent for FY23 from 7.8 per cent projected during the February meeting. Inflation projection has been revised sharply from 4.5 per cent to 5.7 per cent for FY23. Both the projections have been made after assuming crude oil prices at $100/bbl.
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