Asia/Pacific August 23, 2021 / 08:51 am UTC

Reserve Bank of India’s Shifting Bias: Minutes Showing a Hawkish Tilt

By Charu Chanana

The Reserve Bank of India’s August meeting minutes gave an early look into committee members’ dissenting outlooks. While the overall theme of the need to support economic recovery remained, the persistence of inflationary pressures was seen as a rising concern. In fact, MPC member Varma voted for a reverse repo rate hike and changing the stance from accommodative to neutral. 

Figure 1: RBI Meeting Minutes Summary

Source: RBI, Continuum Economics

The Reserve Bank of India’s minutes of the meeting held August 4-6, which saw the benchmark rate being kept unchanged amid an uncertain growth outlook muddled with rising inflationary pressures. Liquidity measures continue to be prioritized as growth recovery remains on shaky grounds. We have been concerned about inflation proving to be more persistent and anchoring inflation expectations higher, which brings a risk of the central bank tapering by the end of the year if no fresh headwinds to growth emerge.

MPC member JR Varma argued for normalization of the policy corridor through a hike in the reverse repo rate. He said that lifting the floor on policy rates by raising the reverse repo rate and changing the accommodative stance at the appropriate time will allow to keep the repo rate lower for longer. He also brought back the MPC’s focus on India’s inflation target being 4%, and allowing inflation to hover in the 5-6% range may inadvertently aggravate the risk that inflationary expectations will be disanchored. 

Committee member Mridul Saggar was not as hawkish, but also proposed gradual unwinding of the super easy policy in a way that it is non-disruptive within the accommodative stance. He hinted at liquidity absorption to precede rate hikes, which is the path we expect the central bank to follow.

These dissenting members are providing a hawkish tilt to the RBI, and likely to make investors edgy at a time when several central banks are unwinding their ultra-easy monetary policies. With the delta variant spreading across the world, and Fed’s tapering plans remaining doubtful as well, we continue to believe that the RBI will extend support to the economic recovery, remaining watchful of any durable inflationary pressures.

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Analyst Certification
I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.