The release of the minutes of the Monetary Policy Committee shows that at least two members are very worried about inflation.Jayant Verma a vocal external member of the MPC writes: “Indian inflation rates have been consistently well above the midpoint of the tolerance zone for an extended period and are forecast to remain elevated for some time.

Moreover, survey data and other indicators show that businesses have no difficulty in passing on cost increases to consumers, and are able to maintain (and even expand) their margins.”Likewise, Mridul Saggar, the RBI member in the MPC writes “As a baseline, inflation is expected to stay elevated from the target but below the upper tolerance level through the year.

However, the probability distribution indicated in the fan chart shows that risks of breaching the upper tolerance level are not insignificant. But for the extra-ordinary circumstances that prevail, we would have moved to a neutral stance long back.” He goes on to say, “ We can continue to support growth for now as the flexible inflation targeting framework allows temporary deviation from the target so long as inflation is expected to be within tolerance bands. “Even the dovish Ashima Goyal says, “ since….inflation is largely predicted to remain within the tolerance band, macroeconomic policy clearly has to further stimulate demand.”Here in lies the problem.

The May CPI at 6.3 percent indicates inflation is no longer within the tolerance band of 6 percent. What’s worse, a dipstick survey of economists, shows that CPI will remain above 6 percent and indeed even touch 7 percent, before it starts falling in the last quarter of this calendar.At the Next MPC meeting on August 4-6, both Jayant Verma and Mridul Saggar, like the other MPC members,  will be confronted with two months of CPI above the tolerance range of 6 percent.

They will also have the statements of the US Fed raising the inflation forecast for that country by one percentage point to 3.4 percent this year from 2.4 percent earlier.If the Fed is right, WPI index in India could be in for more increases. As Mridul Saggar observes,”There are risks to inflation as there have been general price pressures at the WPI level and its inflation as well as its momentum is at its highest for the index with the current base.

”The argument of almost all MPC members has been that inflation is driven by supply-side restrictions and not demand-driven. But the key question, the likes of Verma and Saggar will be asking themselves is, will it be wise to pour increasing amounts of liquidity if the supply of goods and services will grow only slowly? Increasing liquidity in a supply-constrained milieu is bound to increase prices even more.The MPC members can’t vote on liquidity.

That’s RBI’s domain. But these MPC members, whose only solace was that inflation was at least below the tolerance limit, are likely to request a change in ultra accomodative stance.  At any rate, the August meet of the MPC is likely to be a stormy one with perhaps very little chance of a unanimous vote on the stance.Dr Verma has already hinted, “the MPC must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long.”While MPC members can only express displeasure, it is RBI and the government who should be really concerned about the rising inflation and whether a policy of sloshing liquidity with gay abandon may aggravate inflation.

Chances are the RBI already is worried. At least two members, the governor and deputy governor Patra have urged the government to consider using excise and tariffs to bring down prices.“The outlook for energy inflation is the main upside risk, especially as the timing and magnitude of reflation of global demand to pre-pandemic levels is uncertain,” writes Patra. “This warrants close and continuous watching, with preparedness to take countervailing action in the form of duty/tax reductions.”He is almost beseeching the government to cut fuel excise and even consider lowering tariffs of imported commodities whose prices have flared in recent months.

The governor hints as much,” Given the predominant role of supply side factors in the recent inflation movements, active and timely supply side policy measures with regard to petrol and diesel, edible oil and pulses, among others, would be critical to bring about a durable softening of price pressures.”The government would do well to listen to this sage advice and cut not only fuel excise but also some tariffs.

Governor Das has been generous to a fault with liquidity. But he can’t continue sloshing liquidity unconcerned about the side effects. As Mridul Saggar points out, “My judgment is that the policy has worked well in dampening scarring, limiting job losses, generating wealth effects from higher asset prices, thus supporting incomes and consumption under some very difficult circumstances Its continuation for long, though carries the hazard of unintended consequences as incomes may instead fall in real terms worsening its distribution as well.”.Many in the market believe the RBI may have been arm-twisted against its better judgment into coughing up a large dividend.

An RBI dividend is nothing but money printing. The government needs to realise that lowering inflation has be a joint responsibility. If it doesn’t do it’s bit by cutting duties and on the contrary demands greater monetisation, it will be the bigger loser. Yes a CPI that is continually above the tolerance band of 6 percent can hurt RBIs credibility, can lead to a stormy MPC and can hurt the economy  when the hard won gains of low stable inflation are lost.

But ultimately it hurts the government most: there are seven state elections in 2022. And few governments have won in the face of “mehengai”.