MPC members sounded caution on inflation, downside risks to growth

A majority of the Monetary Policy Committee (MPC) members cited upside risks to inflation and emerging downside risks to growth for keeping the policy repo rate unchanged, as per the minutes of the committee meeting released by the Reserve Bank of India on Wednesday.

They also flagged the possibility of fiscal slippage influencing the inflation outlook, heightening market volatility, and crowding out of private investment.

While the decision to keep the policy rate unchanged at 6.5 per cent was unanimous in the 5th Bi-monthly Monetary Policy review on December 5, only Ravindra H Dholakia (former professor, Indian Institute of Management, Ahmedabad) voted to change the stance to neutral from calibrated tightening.

Chetan Ghate, Professor, Indian Statistical Institute, observed that the elevated level of inflation, excluding food and fuel (6.1 per cent) at a three-month high, continues to be problematic.

“Most sub-groups of inflation, excluding food and fuel, other than clothing and footwear, have registered upticks. The reversal in inflation, excluding food and fuel, needs to be carefully watched,” said Ghate.

With both inflation and growth numbers having developed “soft-spots”, Ghate felt that the appropriate risk-management approach at the current juncture would be to “wait and watch”. Pami Dua, Director, Delhi School of Economics, said: “Looking forward, downside risks to the inflation outlook include continuing moderation in food inflation and a sharp fall in crude oil prices.

“At the same time, the slowdown in global growth may also lead to softening of crude oil prices. On the flip side, there is also the possibility of a rebound in crude oil prices due to supply factors.”

Additionally, fiscal slippages by the government may have adverse implications for market volatility and impact the outlook for inflation.

“Upside risks associated with an increase in minimum support prices (MSPs) still persist. Risks due to an increase in state-level House Rent Allowances (HRAs) and input prices also prevail. Thus, there is considerable uncertainty with respect to the inflation outlook and movements in both food inflation and crude oil prices have to be watched closely,” elaborated Dua.

According to Dholakia, with RBI’s own inflation forecast coming down by around 120 basis points and quarterly growth forecasts marginally revised downward, opening up the output gap going forward, there is hardly any justification in retaining calibrated tightening stance.

Michael Debabrata Patra, Executive Director, RBI, was of the view that the Indian economy is experiencing the onset of positive supply shocks as reflected in the sizeable easing of prices of food and petroleum products which could reverse. Accordingly, they should be looked through, while remaining alert to spillovers to the rest of inflation, which is already elevated and rising.

“With average inflation gradually converging to target, these growth impulses can be maintained by ensuring that the expansion remains sustainable,” said Patra.

Viral V Acharya, Deputy Governor, RBI, pointed out that factors such as unexpectedly large collapse in food inflation and oil price crash have resulted in an extraordinary downward revision in RBI’s 12-month ahead inflation outlook. However, the past two months have also been extraordinarily volatile, making it difficult to make a complete sense of recent data.

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