The Reserve Bank of India’s (RBI) six-member monetary policy committee (MPC) will remain vigilant to counter “highly vulnerable” inflationary conditions due to frequent spikes in food prices, the minutes of the MPC meeting held between December 6 and 8 showed. The panel did not want to confuse investors by changing the policy stance just yet.
“Inflation remains highly vulnerable to food price spikes, as the spurt in momentum in daily data on key food items for the month of November and early December reveals,” said RBI deputy governor Michael Patra. He said the repetitive incidence is causing accumulation of price pressures in the system and could impart persistence — which is reflected in a left-tailed skew in the distribution of inflation. Households are already wary, he said. Although they expect inflation to remain unchanged for the next three months, they are more unsure about this prognosis than they were two months ago.
Over the year ahead, households are more sure than in the past that inflation will likely rise. Consumers, too, reveal more pessimism about inflation a year ahead than when they were surveyed in September. “Consequently, the monetary policy has to remain on high alert with a restrictive stance,” Patra said.
India’s retail inflation based on the consumer price index (CPI) fell to a four-month low of 4.87% in October from 5.02% in September, mainly due to the statistical effect of a high base. Retail inflation rose 5.55% in November, its fastest pace in three months, due to higher food prices. In October 2022, CPI inflation was at 6.77%. To lower costs for consumers, the government has curbed export of a wide range of food products, including onions, wheat, rice and sugar.
RBI governor Shaktikanta Das said though inflation dropping to a four-month low in October gave comfort that heightened and generalised inflation pressures seen in the summer of 2022 are behind, the food inflation still remained elevated.
“The overall inflation outlook is expected to be clouded by volatile and uncertain food prices and intermittent weather shocks. In the immediate months of November and December, a resurgence of vegetable price inflation is likely to push up food and headline inflation,” Das said, adding that the MPC has to remain on a “high alert” to any sign of generalisation of price impulses that may derail the ongoing process of disinflation.
Das said the projected inflation of 4.7% in Q3 of the next year, or one year from now, is “perilously” close to 5%, and that in such circumstances, the monetary policy has to be actively disinflationary. Any shift in the policy stance now would be premature and risky.
According to MPC external member Ashima Goyal, despite the MPC’s ‘withdrawal of accommodation’ stance, she expects the weighted average call rate (WACR) to ease from the upper end of the LAF (liquidity adjustment facility) corridor towards the repo rate of 6.50% as the government’s cash balances are drawn down and measures have been taken to reduce liquidity hoarding by banks.
“The RBI had clarified post inflation targeting that its ‘operating procedure aims at modulating liquidity conditions so as to achieve the operating target, i.e., to anchor the WACR around the policy rate’ and ‘MSF rate and the fixed overnight reverse repo rate define an informal corridor for limiting intra-day variations in the call rate.’ Understanding this should alleviate the markets concern that liquidity can suddenly dry up,” she said.
Jayant Verma, an external MPC member, said in coming months, as the MPC becomes more confident about the downward trajectory of inflation, apart from transient food price spikes, there would be a “compelling case” for continually calibrating the nominal policy rate so as to keep the real interest rate slightly below 1.5% – on the basis of projected inflation three-five quarters ahead. “I vote for maintaining the repo rate at 6.50%, but express my reservations on the stance. I believe that a stance is not needed at all at this stage. If at all there is a stance, it should be neutral,” he said.
