MPC Minutes: Task To Contain Inflation Still Not Over, Says RBI Governor Shaktikanta Das

Members of the Monetary Policy Committee reaffirmed their commitment to bringing down inflation and ensuring price stability amid a sudden spike, according to the minutes.

The MPC had decided to keep the benchmark repo rate unchanged at 6.5% for the third straight meet, but with preparedness to undertake policy responses should the situation so warrant. The rate pause came despite retail inflation surging past its target of 4(+/-2)%.

Headline CPI is expected to harden significantly in July-August, driven by the spike in tomato and other vegetable prices, RBI Governor Shaktikanta Das said. 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, he explained.

Supply-side measures need to be continued to prevent the spiraling of frequent food supply shocks into generalised economy-wide price impulses, Das said.

"In this dynamic environment, we remain steadfastly committed to our goal of aligning inflation to the target of 4%," said Das. "We continuously assess the impact of our past actions, the implications of incoming data for the evolving inflation and growth dynamics and stand in readiness to act whenever necessary."

While unanticipated and short-lived supply demand mismatches lie outside the realm of monetary policy, the commitment to price stability requires the RBI to see off "these price perturbations" by guarding against spillovers, Patra said. In India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation, he cautioned.

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

"In June, I warned against declaring victory based on the inflation prints of just a couple of months, and expressed discomfort with the self-congratulatory tone of the MPC statement of that month about inflation having come inside the tolerance band," said MPC member Jayanth R Varma. It is now clear that "we would have a couple of months of inflation readings well above the tolerance band", he said.

"I view these monthly gyrations with some degree of equanimity," said Varma. Just as a couple of low readings do not call for celebration, it is equally true that a couple of very high readings do not call for panic, he said. What is important is the projected trajectory of inflation over the next several quarters.

"On this basis, I continue to have the same cautious optimism that I had in the June meeting," he said.

Varma continued to express reservations on the MPC's stance. This would be the third successive meeting at which the repo rate has been left unchanged, he said. This disconnect between stance and action has completely hollowed out whatever meaning the stance might have originally had, and turned it into a harmless ritualism, he said.

Rajiv Ranjan, executive director at the RBI, said that monetary policy clearly can do little about the first-round effect of a supply-side shock emanating from vegetables, for instance.

If monetary policy responds to such a surge in headline inflation, the policy would likely be excessively tight and induce high volatility in macroeconomic conditions, he explained. On the other hand, if these shocks do not go away and become persistent then inflation expectations can become unanchored, leading to a drift in inflation away from its underlying trend.

"It may be noted that on the earlier two occasions, during mid-2020 and during mid-2021, the MPC’s prognosis of looking through transitory pressures on inflation has in fact proved accurate," Ranjan said.

Pre-emptive supply-side action that prevents repeated or persistent food price shocks would abort second round increase in wages and other prices that could require further monetary tightening and growth sacrifice, MPC member Ashima Goyal said. Policy needs to signal continuing watchfulness towards bringing inflation to the target, she said.

The progress of the rest of the monsoon, possible supply-side action, further pass-through of past rate hikes, the behaviour of food prices and the evolution of core inflation have to be carefully observed, Goyal said.