The monetary policy committee (MPC) members emphasised the need to be vigilant about the evolving retail inflation trajectory in the backdrop of spike in vegetable prices even as the cumulative 250 basis points hike in repo rate is working its way in the economy

The six-member MPC unanimously voted to keep the policy repo rate at 6.50 per cent for the third time on the trot at its last meeting (August 8-10), with 5 out of 6 voting in favour of the monetary policy stance (to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth).

Per the MPC minutes, RBI Governor Shaktikanta Das, observed that while the vegetable price shocks are expected to correct quickly with the arrival of fresh crops, there are risks to the food and the overall inflation outlook from El Nino conditions, volatile global food prices and skewed monsoon distribution - all of which warrant close monitoring.

In the non-food category, crude oil prices have firmed up reflecting tighter supply conditions.

Food price shocks

“Given the likely short-term nature of the vegetable price shocks, monetary policy can look through the first-round impact of fleeting shocks on headline inflation.

“At the same time, we need to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to anchoring of inflation expectations. The impact of the cumulative rate hike of 250 basis points on the economy is still playing out,” Das said.

MD Patra, Deputy Governor, RBI, underscored that the elephant in India is the monsoon, with August shortfalls rendering the outlook uncertain in the shadow of El Nino effects even as Indian Ocean dipole conditions are turning positive.

Also read: Food inflation in metros over 500 bps higher than national average 

“Against this backdrop, recent inflation developments and outlook warrant careful assessment and strategy. ...A risk to the inflation outlook stems from the liquidity overhang in the banking system. Withdrawal of excess liquidity should engage primacy in the attention of the RBI going forward as it presents a direct threat to the RBI/MPC resolve to align India’s inflation with the target, besides the potential risks to financial stability,” he said.

Patra opined that ensuring the sustained easing of core inflation is crucial to the MPC’s objective of bringing inflation down to the target. This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based.

‘A disconnect’

Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad, said: “Just as a couple of low (inflation) readings do not call for celebration, it is equally true that a couple of very high readings do not call for panic. What is important is the projected trajectory of inflation over the next several quarters.

“I am of the view that the current level of the repo rate is high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.”

Varma observed that the disconnect between (monetary policy) stance and action (this would be the third successive meeting at which the repo rate has been left unchanged, assuming that the MPC decides to pause now) has completely hollowed out whatever meaning the stance might have originally had, and turned it into a harmless ritualism. So I am content with expressing reservations about the stance,” he said.