RBI MPC Minutes: Rise In Divergence Between Members Over Growth-Inflation Dynamics

The Reserve Bank of India's monetary policy committee had maintained a status quo on the benchmark lending rate at its last policy meet earlier this month. While concerns regarding persistent food inflation led the committee to maintain the status quo, external members Jayanth R Varma and Ashima Goyal expressed concerns over the growth sacrifice.

With food inflation pressures showing little signs of abatement in the near term, and household inflation expectations picking up, monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components, RBI Governor Shaktikanta Das said. This is critical for the "last mile of disinflation" and anchoring of inflation expectations, he said.

When durable disinflation to the target is still a work in progress, the issue of equilibrium natural interest rate is premature, said Das. Policy making in the real world cannot be based on an abstract, theoretical and model specific construct which is unobservable and time varying. "Hence, any justification for policy easing based on so called high real rates can be misleading."

Inflation is gradually trending down, but the pace is slow and uneven, Das said. Durable alignment of inflation to the target of 4% is still some distance away, he noted. Persistent food inflation is imparting stickiness to headline inflation.

"Inflation expectations need to be kept anchored. Spillovers of food inflation to core have to be avoided. At such a crucial juncture, steady growth impulses are allowing monetary policy to unambiguously focus on supporting a sustained descent of inflation to the target," explained Das.

"The best contribution that monetary policy can make for sustainable growth is to maintain price stability," he said.

Food inflation is taking longer to revert to its trend after a shock, said RBI deputy governor Michael Patra. There is also evidence of the time varying trend of food inflation increasing, negating the gains made through core disinflation, he said.

Monetary policy is an instrument for modulating aggregate demand. Food price shocks may originate outside the realm of monetary policy and initially manifest themselves in supply mismatches, but when their effects stay in the inflation formation process, they can propagate through second-order effects and get generalised to which monetary policy cannot be insensitive.

"The MPC of the RBI has committed to align inflation durably to the target. That is not yet achieved. Any faltering from this commitment could undermine the prospects of the Indian economy," said Patra.

External member Jayanth R Varma expressed concerns over growth sacrifice induced by a monetary policy that is excessively restrictive. Varma also noted that data from various RBI surveys show multiple early warning signals that growth may be already slowing down.

"Expectations of robust growth depend heavily on an expectation that private capital investment will pick up soon. However, we have been hoping for this revival for many quarters now, and hope is not a strategy," Varma cautioned.

"Since Indian inflation is not well measured, and could be over or under-estimated, too much precision with regard to a target is unproductive," another external member Ashima Goyal said. She cautioned that while inflation is on a downward trend, there are some negative signals for Indian growth also.

The MPC minutes showed that members who voted to maintain rates continue to see risks from elevated food inflation and an uncertain inflation outlook, stated a research note by Barclays. "With the continued hawkish rhetoric on inflation, we do not expect rate cuts to start until at least December," Shreya Sodhani, economist at Barclays.