RBI MPC Minutes: Food inflation ‘persistently high’, price stability bedrock for high growth; 5 key highlights

The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Friday, June 21, highlighting that the policy must continue to be actively disinflationary to ensure anchoring of inflation to its target level and fuller transmission. The RBI's rate-setting panel believes that food inflation remains elevated due to high prices of vegetables, pulses, cereals, and spices. However, price stability and resilient growth have created space for the monetary policy to focus unambiguously on inflation, according to the RBI.

On future indicators, the central bank said in its statement that overlapping shocks engendered by rising adverse climate events impart considerable uncertainty to the food inflation trajectory. Volatility in crude oil prices and financial markets, along with firming up non-energy commodity prices, pose upside risks to inflation.

Also Read: RBI monetary policy: Inflation to growth outlook - 5 key highlights from RBI MPC outcome

The RBI at its last bi-monthly MPC meeting on June 7 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. However, MPC members Dr. Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the repo rate by 25 basis points, and change the stance to neutral. The remaining four members voted to maintain the status quo on the policy rate for the eighth consecutive time.

RBI MPC Minutes: Here are the five key highlights-

1.Food inflation 'persistently high', price stability key to growth: RBI Governor

RBI Governor Shaktikanta Das said that the headline CPI or consumer price index (CPI)-based inflation is moderating, but at a very slow pace. The last mile of disinflation is turning out to be gradual and protracted. Food inflation is the main factor behind the grudgingly slow pace of disinflation. Recurring and overlapping supply-side shocks continue to play an outsized role in food inflation.

The impact of exceptionally warm summer months on the output of certain perishables. A likely rabi production shortfall in some pulses and vegetables – particularly potatoes and onions and the upward revisions in milk prices, warrant close monitoring. A normal monsoon may eventually lead to the easing of price pressures on key food items. 

The calibrated tightening by 250 basis points between May 2022 to February 2023 has achieved disinflation with minimal output sacrifice as growth remains strong. ‘’With persistently high food inflation, it would be in order to continue with the disinflationary policy stance that we have adopted. Any hasty action in a different direction will cause more harm than good,'' said Das. Price stability is the bedrock for high and sustainable growth, according to the RBI Governor.

Also Read: Food inflation bites Indian economy: RBI sees uptick in vegetable prices; monsoon key determinant of relief

2.Indian economy remains hostage to intersecting food price shocks: RBI Dy Governor

RBI Deputy Governor Dr. Michael Debabrata Patra said that prospects of a favourable monsoon should offset the slackening momentum that has become a typical feature of first-quarter GDP outturns in the post-pandemic period. Domestic demand should continue to drive the economy, with private consumption receiving a fillip from the revival in rural spending, according to Dr Patra.

The speed of inflation easing has been disappointing so far, even from a cross-country perspective. Food prices, which have persisted for too long, are the principal impediment to a faster disinflation, according to the deputy Governor.

‘’The Indian economy remains hostage to intersecting food price shocks. Their repetitive occurrence calls for intensifying monetary policy vigil to ward off spillovers to other components of inflation and to expectations. This also warrants looking through the statistical soft patch in inflation’s trajectory that is anticipated during July-August 2024, while staying prepared to blunt the uptick that is expected from September. Food prices are holding back any consideration of possible changes in the monetary policy stance,'' said Dr Patra.

3.MPC focussed on disinflation process, fiscal consolidation drivers

MPC member Dr Rajiv Ranjan explained that with the fiscal consolidation, it was argued that monetary policy should be more growth supportive by easing policy rates. According to Dr Ranjan, the counter argument is two-fold: 

(a) What drives fiscal consolidation – if it is largely driven by higher revenues including dividend, which is the case now, the adverse impact on growth may be non-existent. On the contrary, fiscal consolidating could be growth-enhancing if it leads to improved country ratings and easing financial conditions for the private sector
(b) More importantly, the best contribution that monetary policy can make to long-term growth is via price stability. He also added that there could be an argument that a pause for eight successive policies is a long pause. ‘’The inertia of inaction should not drive us to action. Rather the driving force should be the macroeconomic setting of growth and inflation,'' said Dr Ranjan.

Headline inflation has been running within the tolerance band successively for eight months in a row but is still not aligned with the target. Repeated incidence of food price shocks is delaying the final descent of inflation to the target.

4.Restrictive policy will sacrifice FY25 growth, says MPC member

Professor Jayanth R Varma had voted to reduce the repo rate by 25 basis points in the previous policy meeting held in April as well. ‘’It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well,'' said Prof Varma.

Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75 per cent, and lower than the potential growth rate by more than one per cent. 

‘’This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5 per cent above target, and core inflation is extremely benign. The current real policy rate of around two per cent (based on projected inflation) is well above the level needed to glide inflation to its target,'' added Prof Varma.

Also Read: India’s core CPI hits record low BUT food prices to burn a hole in your pocket; Will monsoons bring any respite?

MPC member Dr Ashima Goyal agreed with Varma. ‘'Only small steps are required to align the repo with the fall in inflation so this should not be seen as the start of a rate cut cycle. Communication should make it clear that there is no softening path and forward-guidance remains data-determined. A neutral stance is appropriate since the rate can then move in either direction as required,'' she said.

Growth is below potential and may slow further since consumption remains weak. Increasing income and employment is the only sustainable way to bolster consumption and private investment. Reducing unemployment is important for political and financial stability. Without a rise in productive employment, aggressive redistribution becomes more likely, according to Dr Goyal.

5.Inflation, GDP forecasts for 2024

The real gross domestic product (GDP) growth for 2024-25 is projected at 7.2 per cent with Q1 at 7.3 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent. The retail inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent, according to the central bank.

A favourable monsoon assisting the recovery of agricultural growth and suitable supply management measures would be key to moderating food inflation as the year progresses. There are risks to the anticipated decline in the CPI inflation rate given the uncertainties of the temporal and spatial rainfall distribution, weather conditions during the crop season and the spillover effects of global geopolitical conflicts, according to the MPC members.

‘’The moderate inflation rate will have to be durable to be an effective condition for sustained growth. In this context, the policy would have to continue its focus on maintaining the inflation rate aligned to the target over the medium term. The rise in projected inflation rate above the 4.5 per cent mark in H2 of the financial year reflects the underlying price pressures, which if not addressed would not meet the policy goal,'' said MPC member Dr. Shashanka Bhide.

The next meeting of the MPC is scheduled during August 6 to 8, 2024.