As several storms hit together and the war in Ukraine showed no signs of abating, the wait till June for the scheduled monetary policy to raise interest rate would have meant losing time and opting for a stronger action, RBI Governor Shaktikanta Das said.

The monetary policy committee (MPC) unanimously decided to go for an off-cycle hike in interest rate on 4 May. After a long pause since August 2018, the repo rate was raised by 40 basis points to 4.40%. The Reserve Bank of India (RBI) also said the cash reserve ratio (CRR) would increase by 50 basis points to 4.50% from 21 May. 

"Waiting for one month till the June MPC would mean losing that much time while war related inflationary pressures accentuated. Further, it may necessitate a much stronger action in the June MPC which is avoidable," Das told members of the MPC.

The MPC has six members, including Das. The timing of the MPC’s decision surprised markets, though rate hike was expected due to the rising inflation.

“Our monetary policy response should be seen as an important step to steady the ship. The Indian as well as global evidence clearly shows that high inflation persistence hurts savings, investment, competitiveness and growth,” Das said, as per the minutes of the MPC meeting held from 2-4 May.

Das outlined the Russia-Ukraine war, rise in global commodity prices and power tariffs as major factors leading to inflation and impacting growth. 

The off-cycle monetary policy actions were aimed at lowering inflation and anchoring inflation expectations with a view to strengthening the medium-term growth prospects of the economy and protecting the purchasing power of the weaker sections of society, Das said.

"Our monetary policy actions today aimed at lowering inflation and anchoring inflation expectations should thus help to strengthen the medium-term growth prospects of the economy and protect the purchasing power of the weaker sections of society," he added.

As per the minutes of the MPC, external member professor Jayanth R Varma said that more than 100 basis points of rate increases needs to be carried out very soon. He was of the view that inflation risks had become sharper in terms of magnitude and persistence since April. 

“There is a lot of catching up to do because the MPC (a) rightly prioritised economic recovery at the height of the pandemic in 2020 and early 2021, and (b) delayed the normalisation by continuing the forward guidance for far too long after the pandemic abated,” Varma said.

MPC member and RBI Deputy Governor Michael Debabrata Patra said at the meeting that in this milieu, a measured approach and a cool head is warranted.

"Recent incoming data suggest that India's macro-fundamentals, barring imported food and fuel inflation, are still intact and in sync with the recovery that has been tenaciously making its way through waves of the pandemic," he remarked.

MPC member and RBI Executive Director Rajiv Ranjan too said the global macroeconomic and financial environment has turned extremely adverse since February 2022 with the start of the war in Ukraine and is posing significant challenges to real-time macroeconomic assessment and management.

With economic recovery better entrenched than before, it is time to address the concerns on the inflation front, the dynamics of which has been fundamentally altered by the outbreak of the conflict in Europe.

"Though monetary policy may not have a direct influence on exogenous global commodity price shocks brought about by the war, it can play an important role in avoiding the generalisation of inflationary pressures," he said.

MPC external member Ashima Goyal was of the view that government supply-side action can also reduce future rate rises, output sacrifice and borrowing costs.

Both central and state taxes are buoyant and likely to exceed any rise in subsidy costs because of the Ukraine crisis, giving them space to cut taxes on fuels, she said.

According to her, countercyclical fuel taxes are necessary to prevent a ratchet effect raising inflation.

The next meeting of the MPC is scheduled to be held from 6-8 June.