The rise of inflation in May and June, according to RBI Governor Shaktikanta Das, revived the debate regarding monetary policy response.
According to the minutes of the Monetary Policy Committee's (MPC) most recent meeting, Das stated that the Reserve Bank of India's (RBI) approach, supported by meticulous advice on all elements of monetary policy conduct, has been an essential facilitator for the country's current state of recovery.
"The resurgence in inflation in May and June above the upper threshold has reignited the debate on the appropriate monetary policy response. The gains in monetary policy credibility since the adoption of inflation targeting have helped the MPC to respond effectively to growth-inflation trade-offs posed by an exceptional shock like the Covid-19 pandemic," he said.
He stated that the flexible inflation targeting (FIT) approach provides the MPC with the flexibility to deal with unanticipated economic shocks while conducting monetary policy.
According to the RBI, the rebound in inflation in India following the June 2021 policy is mostly due to adverse supply-side dynamics affecting food, gasoline, other key categories as a result of the pandemic's numerous disruptions.
"Many of current price shocks are likely to be one-off or transitory. Weak demand conditions and low pricing power are limiting the extent of their pass-through to output prices," Das said. Managing the economy and the financial markets since the beginning of the pandemic has thrown up several challenges with crosscurrents and conflicting objectives, he said.
Voting in favour of a status quo of policy rate and accommodative stance, Das said: "Macroeconomic policies have to be carefully nuanced by making judicious policy choices. Continued policy support with a focus on revival and sustenance of growth is indeed the most desirable and judicious policy option at this moment."