India's six-member monetary policy committee (MPC) members appeared increasingly divergent in their views on the future course of rate hikes, with some external members arguing that further tightening could hamper the economic recovery, the minutes of their latest meeting showed on Thursday.
The Reserve Bank of India (RBI) kept its key lending rate steady for a second straight meeting on June 8, as widely expected, but signalled monetary conditions will remain tight for some time as it looks to further curb inflationary pressures.
"Monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy," external member Jayant Varma wrote in the minutes published by the RBI.
Ashima Goyal, another external member, said inflation is falling as expected, and it is important to ensure the real repo rate does not rise too high and damage the economic cycle.
"Commitment to such a regime (inflation targeting) only involves aligning the nominal repo rate with expected inflation.
It does not require the nominal repo to be kept higher for longer," she wrote.
However, all three internal members of the RBI continued to focus on the upside risks to inflation and reiterated that the pause in June was only for the specific policy and future rate actions would depend on evolving macroeconomic data.
"Beyond the first quarter, however, pressure points emanating from specific supply-demand mismatches could impart upward pressure to the momentum of prices and offset favourable base effects, especially in the second half of 2023-24," wrote Michael Patra, deputy governor at the RBI.
"Hence, monetary policy needs to remain in 'brace' mode, ensuring that the effects of these shocks dissipate without leaving scars on the economy."
Annual retail inflation cooled to a more than two-year low of 4.25% in May from 4.7% in April, firmly within the RBI's inflation band of 2%-6% for the third straight month.
However, RBI Governor Das said the MPC's job was only half done by bringing inflation to within the tolerance band.
"Our fight against inflation is not yet over. We need to undertake forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if situation so warrants," he wrote.
The RBI in its policy also brought back the focus on 4% as the medium term target of the MPC and not just the 2-6% band.
Rajiv Ranjan, executive director at the RBI, said with greater clarity on macro fronts, prudence requires that the MPC now focuses on aligning inflation to the target of 4%.
"Time is opportune to emphasise the distinction between the inflation target and tolerance of deviations from the target," he said.