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The MPC sensibly decided to keep monetary policy accommodative despite inflation being marginally above its tolerance band. Two good reasons justify the policy: (a) inflation is high partly because of (external) supply shocks, so reducing aggregate demand (through monetary tightening) will not address the issue; (b) there is a considerable output gap, with the economy having contracted 6.6% in FY21, and estimated to have grown 8.9% in FY22 (far from closing the gap, in an economy with potential growth of 7% annually). Staying accommodative is thus the right approach: loan growth needs to accelerate to enable a rebound in domestic demand, but the RBI will also withdraw accommodation tactically if inflation gets too far from the target.
