The lone dissenting member voting against a continued “accommodative” stance of the monetary policy committee (MPC) did so to favour a raise in the reverse repo rate, minutes of the August 4-6 meetings showed.

       The monetary policy discussions this time were challenging considering inflation print came at 6.3 per cent in May and June, above RBI's tolerance band of 2-6 per cent. However, inflation moderated in July to 5.6 per cent, while the RBI continued to carry with ultra-loose monetary policy accommodation, with system liquidity reining at above Rs 11 trillion. The six-member MPC spurred on the prolonged accommodation, complicated by the high inflation print.

       Jayanth R Varma, an external member of the MPC, objected strongly against the continuation of the stance for as long as necessary, arguing that the Covid crisis could be here to stay for the next three to five years, while keeping the monetary policy “highly accommodative for such a long horizon is very different from doing so for what was earlier expected to be a relatively short crisis.”

       Monetary policy is less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy, he argued. But the monetary policy might have stimulated “asset price inflation to a greater extent than it is mitigating the distress in the economy,” Varma said.

       The external member was critical of RBI taking comfort on the upper end of the target range. “It is important to emphasize that the inflation target for the MPC is 4 per cent and not 6 per cent or even 5 per cent. The tolerance band is designed to allow for forecast errors, implementation shortfalls and measurement issues. Treating 5 per cent as the target would significantly increase the risk of inflation targeting failures,” Varma said, adding that in this context, the current level of the reverse repo rate is “no longer appropriate.”

       “I have for some time now being arguing that if the reverse repo rate does not fall within the remit of the MPC, then the announcement of this rate should be in the Governor’s statement and not in the MPC’s statement, but this view has not found favour with the rest of the MPC. Hence, I have no choice but to express my disagreement with the level of the reverse repo rate,” Varma said, adding a gradual normalization of the width of the corridor (between repo and reverse repo rate) was required while keeping repo rate at 4 per cent.

       RBI executive director and head of monetary policy department, Mridul K. Saggar defended the RBI’s stance.

       “Policy focus to revive growth on a durable basis needs to continue and should entail consideration to avoid inflation risks that may emanate when credit demand improves, likely ahead of output gap closing. This arduous task needs to be carried without endangering sustainable recovery in growth,” Saggar said.

       “Averting markets becoming opiated to slush liquidity designed as temporary crisis measure is critical to facilitate unwinding when the time comes. Gradual adjustments that are non-disruptive are possible within the accommodative stance. Therefore, I vote with the resolution,” Saggar said.

       RBI deputy governor Michael Patra clarified that the “highest priority now is to revive growth along a sustainable trajectory that becomes compatible with the inflation target as the pandemic recedes.”

       “The price that has to be paid for this policy choice is inflation in the upper reaches of but within the tolerance band in this exceptional, pandemic ravaged year of 2021-22, as against the overshoot above the upper tolerance band in 2020-21,” Patra said. He said, adding so far the inflation is tracking this projected path.

       RBI governor Shaktikanta Das said the recent resurgence in inflation was driven largely by adverse supply side drivers, and many of the current price shocks would be one-off or transitory. The monetary policy should be nuanced at this point, the governor said.

       “Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment,” Governor Das said in his minutes.

       External member Ashima Goyal said, whenever normalization starts, “it should be very gradual and aligned to growth recovery and inflation paths. Since stance affects only repo rate actions, other normalization can start even in an accommodative stance.”

       “All policy measures are needed to achieve normalisation of economic activities and moderation of inflationary pressures,” said external member Shashanka Bhide.