The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Friday, highlighting that the headline inflation has seen upward movement in June to 5.1 per cent, as food inflation pressures increased and offset the impact of subdued core (CPI excluding food and fuel) inflation and deflation in the fuel group.
On future indicators, the central bank said in its statement that headline inflation in July and Q2 of the current financial year are expected to be lower, given their base effect advantage; but 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.
“This is critical for the ‘last mile of disinflation’ and anchoring of inflation expectations. Food inflation may soften due to good monsoon, steady improvement in kharif sowing, rising reservoir levels and a likely favourable rabi season output. Uncertainty, however, comes from frequent recurrence of adverse weather events, resurgence of geo-political tensions and financial market volatility. Further, core inflation might just have bottomed out,” the statement read further.
Here are the key highlights:
RBI Governor Shaktikanta Das noted that the calibrated increase in policy repo rate by 250 basis points since May 2022 and subsequent change of stance to withdrawal of accommodation has facilitated gradual disinflation over 2022-23. With a forecast of 4.5 per cent headline inflation for 2024-25, the present policy repo rate is broadly in balance and avoids costly sacrifice of domestic economic activity.
“Inflation is gradually trending down, but the pace is slow and uneven. Durable alignment of inflation to the target of 4.0 per cent is still some distance away. Persistent food inflation is imparting stickiness to headline inflation,” added Das.
RBI Guv further highlighted that the economic momentum from Q4 FY24 persisted into Q1 FY25, although there has been a slowdown in corporate profits, reduced government expenditure, and a decline in core output. He added that positive developments, including favorable Kharif sowing progress due to the South-West Monsoon and improved reservoir levels, which are expected to support Rabi output. Moreover, the increase in agricultural activity is likely to boost rural consumption, while urban consumption remains steady.
Meanwhile, RBI Deputy Governor Michael Patra aaserted that food inflation hindering CPI alignment.
Patra stated that the gap between headline and food inflation is impeding the alignment of the Consumer Price Index (CPI) with the target. He added that food inflation is taking longer to return to its trend after recent shocks. Patra also added that persistent food inflation is undermining the gains made in core disinflation.
Prof. Jayanth R. Varma, considered the dissenting voice in the MPC, expressed concerns about the impact of an ‘excessively restrictive’ monetary policy stance on the country’s economic growth.
“For the last several meetings, I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. The majority of the MPC however do not share this concern, perhaps because they think that the Indian economy is already growing at close to its potential growth rate. I think that such a view reflects (a) an unwarranted pessimism about the growth potential of the economy and (b) an overly sanguine expectation about growth in ensuing quarters. I disagree with both prongs of this assessment,” Varma questioned.
He added, “Multiple policy measures during the last few years including digitalization, tax reforms, and a step up in infrastructure investment have in my view boosted the potential growth rate of the Indian economy to at least 8 per cent. A confluence of demographic and economic factors present India with a rare opportunity to accelerate its growth over the next decade or more.”
Dr Ashima Goyal said, “In India food inflation has risen, but the heat wave has had less than the expected effect, although household inflation expectations, which are sensitive to supply shocks, have risen marginally. Vegetable inflation is transient, less than last year and is already correcting with the good monsoon.”
She added, “Although RBI inflation projections are rising after falling due to base effects, they fall again. So the overall trend into next year is downwards. The Q1 FY26 projection is 4.4%.”
Dr Shashanka Bhide, member MPC said, “A major push on consumption spending growth is expected to come from the improved agricultural prospects supported by a favourable monsoon this year and the moderating inflation rate. While the monsoon rainfall is expected to be at the normal level and exceeding the level in the previous year, nature of its distribution during the monsoon period and across regions would be of critical for raising agricultural sector’s growth substantially from its estimated GVA growth of 1.4 per cent in 2023-24.”
He added,”Favourable monsoon aiding agricultural growth this year would ease the supply side pressures to bring down the prevailing high food inflation. Appropriate supply management strategies would always be needed to minimise the sharp changes in the prices of perishable commodities. The evolution of price trends in the non-food categories also need to be monitored even as the food inflation declines.”
The RBI at its last bi-monthly MPC meeting on August 8 decided to keep the repo rate unchanged at 6.5% for the ninth consecutive time, and to maintain the “withdrawal of accommodation” stance.
