RBI MPC Minutes: Members In Wait-And-Watch Mode Amid Emphasis On Flexibility

Members of the Reserve Bank of India's Monetary Policy Committee remained cautious on inflation and optimistic on growth, while emphasising on the need for flexibility given global factors, showed the minutes of the last MPC meeting released on Wednesday.

The MPC, which met from Oct. 7 to Oct. 9, had voted to keep the benchmark repo rate unchanged for the tenth straight time. However, it changed its stance to "neutral", possibly paving the way for future rate cuts.

"At this stage of the economic cycle, having come so far, we cannot risk another bout of inflation," RBI Governor Shaktikanta Das said.

The best approach now would be to "remain flexible" and wait for more evidence of inflation aligning durably with the target, he said. The medium-term retail inflation target of the RBI remains 4%.

The balance between inflation and growth is well-poised, according to Das. Despite the near-term uptick in inflation, the outlook for headline inflation towards the later part of the year and early next year points to further alignment with the 4% target. Thus, the conditions are appropriate for a change in monetary policy stance to neutral from withdrawal of accommodation, he explained.

This would provide greater flexibility and optionality to monetary policy to act in accordance with the evolving outlook, he added. It also provides space to watch out for the uncertainties on the horizon— ranging from heightened geopolitical tensions and volatile commodity prices to risks of adverse weather in food inflation. These are significant risks and their impact cannot be underestimated, he said, while stressing on the need to remain vigilant.

On food prices, Das said that a decline was seen in July-August, but high frequency food price indicators available for September "indicate an upturn". Together with a large unfavourable base effect, this would in all probability lead to a substantial jump in headline inflation in September, he noted.

The momentum in food prices continues even in the first week of October which, if sustained, is likely to keep even October headline inflation high, the RBI governor further said. However, beyond the short-term, the outlook for food inflation is becoming more favourable with improvement in kharif and rabi season prospects, he added.

"Core inflation, in absence of a major cost-push shock, is likely to remain contained on continuing transmission of past monetary policy actions. These considerations have resulted in inflation projection of 4.5% for 2024-25," he underlined.

RBI Deputy Governor Michael Patra, during the MPC meeting, said it would be appropriate to undertake an appropriate recalibration of the monetary policy stance that "reflects an openness to reducing the degree of policy restraint" if inflation evolves along the trajectory set out in the baseline projection. At the same time, reducing restraint "too quickly may negate the progress made on disinflation", he warned.

"A gradual wait-and-assess approach to removing policy restraint in terms of the policy rate remains appropriate as long as inflation is not lastingly close to its target," he stated.

Rajiv Ranjan, the central bank's executive director, said there is enough evidence to give confidence that the monetary policy is on the "right track".

Keeping in mind the balance in the growth-inflation outlook, the risk-reward for a change of stance to neutral is favourable now, he said. "But change in stance in no way implies dropping the guard on inflation."

Between now and December, the MPC will have greater clarity on some of the uncertainties, which includes the US presidential elections, geopolitical risks, the Chinese fiscal stimulus and its impact on global commodity prices, Ranjan added.

MPC's external member Saugata Bhattacharya said the near term growth-inflation trade-off at this point in time seem largely balanced, even as inflation is projected to be trending towards the target.

The extent of ambiguity emanating from economic signals warrants a need for policy to be able to respond readily to evolving economic conditions, based on incoming data, he said. "As such, the first step is to change the policy stance to neutral, providing flexibility and optionality for future actions".

External member Nagesh Kumar, who voted for a 25 basis points rate cut, said this is an "opportune moment" for the RBI to to start the process of normalising the monetary policy. "Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic as well as export markets is flagging, a rate cut could help to revive demand and help boost private investment," he said.