RBI MPC Minutes: Growth impulses allow policy to focus on disinflation, food inflation sticky to core; 5 key highlights

The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Thursday, August 22, highlighting that the policy must continue to be disinflationary until a durable alignment of headline inflation with the target is achieved. The RBI's rate-setting panel believes that food prices remain elevated which may adversely result in spillovers to core inflation. 

The MPC expects domestic growth to hold up on the strength of investment demand, steady urban consumption, and rising rural consumption. The MPC also noted there were indications of core inflation bottoming out. It added that adverse climate events remain an upside risk to food inflation, and crude oil prices are volatile due to demand concerns and geopolitical tensions.

Also Read: RBI members in rate-setting panel reject excluding food from inflation target

The RBI at its last bi-monthly MPC meeting on August 8 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 ninth consecutive time.

RBI MPC Minutes: Here are the five key highlights-

1.Growth impulses allowing monetary policy to focus on inflation, food inflation sticky: RBI Governor

RBI Governor Shaktikanta Das said that the pickup of agricultural activity is expected to boost rural consumption further. Private corporate investment is also gaining steam, with capacity utilisation reaching its highest level in 11 years. However, with food inflation pressures showing little signs of abatement in the near term, monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components.

‘’This is critical for the ‘last mile of disinflation’ and anchoring inflation expectations. Food inflation may soften due to good monsoons, steady improvement in kharif sowing, rising reservoir levels, and a likely favourable rabi season output,'' said the RBI Governor.

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‘’At such a crucial juncture, steady growth impulses allow monetary policy to unambiguously focus on supporting a sustained descent of inflation to the target. The best contribution monetary policy can make for sustainable growth is maintaining price stability,'' added Das.
 

2. Accumulation of price pressures threatens outlook for both inflation and growth: RBI Dy Governor

RBI Deputy Governor Dr. Michael Debabrata Patra said that persistently rising prices are always and everywhere a reflection of too much demand chasing too little supply, even if a supply shortfall starts the price spiral. ‘’It is the remit of monetary policy is to adjust demand conditions to the state of supply because this accumulation of price pressures threatens the outlook for both inflation and growth,'' said Dr Patra.

According to Dr Patra, the wedge between headline and food inflation has widened, stalling the former's alignment with the target. Considering double-digit inflation in salient food categories such as cereals, pulses, spices, and vegetables, empirical evidence points to a rise in the time-varying persistence of food inflation, i.e., it is taking longer to revert to its trend after a shock. There is also evidence of the time-varying trend of food inflation increasing, negating the gains made through core disinflation.

Also Read: RBI monetary policy: Status quo on repo rate for 9th consecutive time - 5 key highlights from RBI MPC outcome
 

3. Decline in food inflation to open window for change in policy

MPC member Dr Rajiv Ranjan explained that overall growth is holding up in 2024-25 mainly on three counts. First, consumption, which was lagging during 2023-24, will recover in the current year, led by rural consumption, on the back of better progress of the monsoon, higher sowing, and moderating inflation. 

Second, the Union Budget 2024-25 is growth-positive, with provisions for higher capital and revenue expenditures. Capital expenditures are budgeted to grow by 17.1 per cent (on top of 28.2 per cent in 2023-24).

Third, investment activity is picking up, as witnessed by improving capacity utilisation, a pick-up in investment intentions, and continued buoyancy in steel consumption and capital goods imports. Strong FDI flows at the start of the year are also positive from a capex cycle viewpoint.

According to the MPC member, headline inflation is projected to continue on the disinflation path towards the target rate, though gradually, with inflation projections indicating a significant moderation by Q4 of the financial year. 

‘’Steady progress in monsoon with a favourable La Nina, higher kharif sowing, a favourable rabi season on good soil moisture conditions, and softening global food prices may lead to a more than anticipated decline in food inflation pressures over the course of the year. This could open the window for monetary policy to change its course,'' said Dr Ranjan.

Also Read: RBI Monetary Policy: MPC keeps FY25 inflation forecast unchanged at 4.5%
 

4.Current repo rate translates into real rate of 2.1 per cent, says MPC member

Professor Jayanth R Varma had voted to reduce the repo rate by 25 basis points since the April policy meeting. ‘’RBI’s projections show inflation bouncing up and down from quarter to quarter, but the trend line is clearly downward, and the projected inflation for the first quarter of 2025-26 is 4.4 per cent. On a forward-looking basis, the current repo rate of 6.5 per cent translates into a real rate of 2.1 per cent,'' said Prof Varma.

According to the MPC member, this is well above what is needed to drive inflation to the target of four per cent. Disinflation has been protracted, so restrictive monetary policy must be maintained for a few more quarters. However, the real interest rate of 1.5 per cent is sufficiently restrictive.

MPC member Dr Ashima Goyal agreed with Varma. ‘’The real rate affects the real sector. The MPC, whose mandate covers all groups, has to be concerned about ‘correct’ real rates to balance interests and seize opportunities. The first priority for India is to create more productive jobs to utilize the demographic dividend and prevent political instability,'' said Dr Goyal.

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5.Inflation, GDP forecasts for 2024

According to the central bank, the real gross domestic product (GDP) growth for 2024-25 is projected at 7.2 per cent, with Q1 at 7.1 per cent, Q2 at 7.2 per cent, Q3 at 7.3 per cent, and Q4 at 7.2 per cent. Retail inflation for 2024-25 is projected at 4.5 per cent, with Q2 at 4.4 per cent, Q3 at 4.7 per cent, and Q4 at 4.3 per cent.

‘’High food inflation would hit growth adversely as it affects consumption and requires restrictive monetary policy to soften core inflation, especially when faced with significant spillovers of persistent food price pressures to core components. The average sequential month-over-month momentum of headline inflation is likely to be high during July-September,'' said MPC member Dr. Shashanka Bhide.

The next meeting of the MPC is scheduled during October 7 to 9, 2024.