RBI policy focused on disinflation; food price shocks pose risk: 5 key highlights from MPC Minutes

The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Friday, December 22, highlighting that domestic food inflation unpredictability, and volatility in crude oil prices and financial markets in an uncertain international environment pose risks to the inflation outlook. Hence, the central bank’s monetary policy continues to remain actively disinflationary, according to the MPC minutes.

The MPC observed that the policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission. ‘’The MPC will remain resolute in its commitment to aligning inflation to the target. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” said the central bank in its statement.

Also Read: Long-term inflation outlook at odds with near-term risks: RBI Bulletin

The RBI at its last bi-monthly monetary policy committee (MPC) meeting on December 8 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. All six members including M D Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma and Rajiv Ranjan voted for status quo on the policy rate for the fifth consecutive time.

RBI MPC Minutes: Here are the top 5 highlights-

1.Food price shocks, weather changes pose risk to inflation: The central bank said that uncertainties in food prices along with unfavourable base effects are likely to lead to a pick-up in headline inflation in November-December. Kharif harvest arrivals and progress in rabi sowing together with El Niño weather conditions need to be monitored.

The path of disinflation needs to be sustained. ‘’The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation,” said the central bank. Taking into account these factors, CPI inflation is projected at 5.4 per cent for 2023-24, with Q3 at 5.6 per cent; and Q4 at 5.2 per cent.

2.RBI policy to remain disinflationary, align inflation to 4% target: As the cumulative policy repo rate hike is still working its way through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting, but with preparedness to undertake appropriate and timely policy actions, should the situation so warrant.

The central bank added that the policy continues to remain actively disinflationary to ensure anchoring of inflation down to the 4 per cent target. The rate-setting panel also decided to focus on withdrawal of accommodation -indicating rates may remain higher for longer, keeping inflation under target.

Also Read: India remains fastest-growing major economy, Q2 GDP growth beats RBI estimates: 5 key takeaways

3.Households wary on price rise, consumers reveal pessimism: MPC members highlighted that inflation remains highly vulnerable to food price spikes. The repetitive incidence is causing the accumulation of price pressures in the system and could impart persistence, reflected in a left-tailed skew in the distribution of inflation.

Households are already wary, although they expect inflation to remain unchanged three months ahead, they are more unsure about this prognosis than they were two months ago, according to RBI Deputy Governor.

‘’Over the year ahead, however, they 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. Monetary policy has to remain on high alert with a restrictive stance,” said Dr. Michael Debabrata Patra.

India’s retail inflation surged sharply to 5.55 per cent in November after falling to a four-month low of 4.8 per cent in October.

4. Indian economy resilient amid geopolitical risks, market volatility: RBI Governor Shaktikanta Das said that the years 2020 to 2023 will perhaps go down in history as a period of ‘Great Volatility’. In this environment, the Indian economy presents a picture of resilience and momentum as reflected in the higher than anticipated GDP growth, according to Das.

‘’Reflecting this, our growth projection for the current year has been revised upward to 7 per cent. We expect this growth momentum to continue next year also,” said the RBI Governor. Improved momentum in investment demand along with business and consumer optimism, would support domestic economic activity and ease supply constraints.

The Indian economy grew 7.6 per cent during the July-September quarter of the current financial year 2023-24 (Q2FY24), remaining the fastest-growing major economy in the world.

5. Slowdown, geopolitical conflicts pose risks for global economy: Crude oil prices have decreased, US bond yields have softened, and the US dollar has weakened since the October policy. The RBI drew comfort from the reversal of these trends in the December policy. The impact of these dynamics is seen globally in terms of faster than expected decline in inflation of advanced countries.

MPC member Dr. Shashanka Bhide said that the weak global demand conditions have kept the commodity and energy prices in the international markets in check. However, continued geopolitical conflicts cast a shadow on supply chains with potential to disrupt global energy and commodity markets and inflation trends.

Despite continuing overall global uncertainty, the macroeconomic environment in advance and emerging market economies has not been adversely impacted to the same extent as it was expected, not a long time ago. ‘’The global economy seems to have dodged a hard landing, though it continues to remain vulnerable to slow down risks,” said MPC member Dr Rajiv Ranjan.