Policy interest rate increases may look necessary with the Monetary Policy Committee (MPC) admitting to the prospects of inflation remaining above the target for some quarters amid global supply shocks emanating from the spillover of escalating Russia-Ukraine war.

But MPC members appeared to be in a dilemma on the timing of the policy tightening as this could hamper the economic recovery.

“Monetary policy is not a rocket science, but the timing of the launch of the rocket is nevertheless important as monetary policy transmits to its final goals with long and variable lags. With a flatter Phillips curve, tackling inflation becomes that much harder as it may call for larger output sacrifice. So, a deft policy mix is needed,” Mridul K Saggar, MPC member and RBI executive director had said at the policy meeting.

A flatter Phillips suggested that high inflation was not due to rise in economic activity or due to rise in demand.

India’s consumer price index (CPI), which overshot the RBI’s upper tolerance band of 6%, is fuelled by the escalating Russia-Ukraine conflict that has upset the global supply chains. The conflict and its accompanying sanctions on Russia have also posed great risks to global growth. The CPI print rose to 6.95% in March which is a 17-month high.

“The estimates now point to inflation remaining above the upper tolerance band in the near-term even as growth projections have undergone downward revisions. These are indicative of the sheer magnitude of the adverse exogenous supply and price shocks. While the risks to domestic growth call for continued accommodative monetary policy, inflationary pressures necessitate monetary policy action,” RBI Governor Shaktikanta Das said, the minutes of the April MPC meeting showed.

Given the fast evolving global scenario, external MPC member Jayanth R Varma argued that the MPC should avoid providing forward guidance and keep the options open to react to evolving situations to keep the credibility of communication.

“The hostilities in Europe have imparted an adverse shock not only to inflation, but also to growth. While the inflation shock is more clearly and immediately visible, the growth shock cannot be ignored. There is at least anecdotal evidence that businesses are becoming reluctant to pass on input cost increases to the customers because of concerns about demand compression,” said Varma, professor at IIM Ahmedabad.

RBI at its latest monetary policy on April 8 kept the repo rate unchanged at 4% for the eleventh time in a row, but signaled to a “less accommodative” stance by announcing a phased and prolonged withdrawal of liquidity that had been pumped into the system during the height of pandemic.

Deputy governor MD Patra expressed concerns that a fight against price rises, which is due to supply disruptions caused by the war, could derail economic recovery.

“The view gaining ground is that inflation is at heights that have shattered glass ceilings and the only way to excoriate it is to force a recession – the so-called hard landing. The dilemma is even sharper for central banks with dual mandates – will their remits allow them to kill the economy for price stability?” he said.