India’s retail inflation is "unacceptably and uncomfortably" high, Reserve Bank of India (RBI) Governor Shaktikanta Das said at the recent monetary policy review meeting which hiked repo rate by 50 basis points.

The other members of the Monetary Policy Committee (MPC) shared similar views, according to the minutes of the meeting released by the RBI on Friday.

"Although inflation seems to have peaked, it is still unconscionably high," RBI deputy governor Michael Patra said.

At its meeting from August 3 to 5, MPC decided to increase the benchmark lending rate by 50 basis points to 5.40% to combat inflation.

The sequence of policy measures, Das said, "is expected to strengthen monetary policy credibility and anchor inflation expectations".

"Our actions would continue to be calibrated, measured and nimble depending upon the unfolding dynamics of inflation and economic activity," he said.

According to Patra, frontloading of monetary policy actions "can keep inflation expectations firmly anchored, re-align inflation with the target and reduce the medium-term growth sacrifice as it is timed into the recovery underway."

MPC member Jayant Varma said that ‘withdrawal of accommodation’ should be dropped as it means that the committee is focused on taking the repo rate back to 6.5%.

“Because the rate hike in this meeting takes the policy rate above the pre-pandemic level, “withdrawal of accommodation" cannot refer to withdrawal of the pandemic-era accommodation. It can only mean withdrawal of the pre-pandemic accommodation that began with the rate cut from 6.50% to 6.25% in February 2019. A plain reading of this resolution would then be that MPC is focused on taking the repo rate back to 6.50%. In my view, such an indication of a terminal repo rate of 6.50% is totally unwarranted in the situation that we are in," Varma said. 

Ashima Goyal, who is also on the rate-setting panel, said that there is a high likelihood of further front-loaded tightening without restricting the freedom of MPC to respond to the changing environment in a data-driven manner.

“The repo rate does not respond to the exchange rate. This is market-determined, with India’s capital flow and reserve management effectively reducing exchange rate volatility, which can be too high in emerging markets under global shocks. Research shows that inflation targeting works better in developing economies if additional instruments are available to address excess exchange rate and capital flow volatility. India has many such instruments that can be activated if necessary," Goyal, an economist, added.