MPC Members Exercise Caution Regarding Potential Near-Term Inflation Uptick

The recent Monetary Policy Committee (MPC) meeting, conducted from August 8-10, shed light on the majority of members expressing concerns about the imminent rise in retail inflation. The minutes of the meeting revealed the cautious sentiment prevailing among committee members.

RBI Governor Shaktikanta Das highlighted the anticipation of a significant uptick in headline inflation during July and August. This projection is attributed to the sharp increase in prices of vegetables, particularly tomatoes, as indicated by the meeting minutes.

Rajiv Ranjan, another member of the committee, drew attention to the uncertainty surrounding food prices due to the predicted continuation of irregular monsoon conditions for the next two months, coupled with the El Nino weather phenomenon and the volatile state of global food prices.

In a similar vein, MPC panel member Ashima Goyal emphasized the importance of monitoring factors such as the progression of the monsoon and potential supply-side measures before determining the course of future interest rates.

In the recent MPC meeting held on August 10, the decision to maintain the repo rate at 6.5 percent was unsurprising, given the persistent threat posed by inflation in India’s economy. This move followed a recent inflation surge caused by elevated food prices.

The minutes of the policy meeting pointed toward the Reserve Bank of India (RBI) adopting a cautious stance, taking a wait-and-see approach due to ongoing concerns about inflation despite a recent downtrend. Notably, the RBI has raised interest rates by 250 basis points (bps) since May 2022 in its ongoing battle against inflation.

July witnessed India’s headline retail inflation rate crossing the upper boundary of the RBI’s 2-6 percent tolerance range, soaring to a 15-month high of 7.44 percent. This jump was largely propelled by a substantial surge in vegetable prices.

The Consumer Price Index (CPI) inflation rate for July, at 7.44 percent, stood considerably higher by 257 basis points compared to the revised June figure of 4.87 percent. This marks the 46th consecutive month in which inflation has exceeded the RBI’s medium-term target of 4 percent.

In the August monetary policy review, the central bank revised its inflation forecast for 2023-24 upwards by 30 bps to 5.4 percent. The RBI’s projections for CPI inflation in 2023-24 indicate rates of 6.2 percent for Q2, 5.7 percent for Q3, and 5.2 percent for Q4. Additionally, CPI inflation for Q1 of 2024-25 is expected to be at 5.2 percent.

Governor Das remarked during the August 10 monetary policy address that given the likely short-term nature of these inflationary pressures, the monetary policy can endure the elevated inflation prints stemming from such temporary shocks for a certain period.