RBI MPC Minutes: Food Inflation Seen Easing In Near Future, May 'Open Up Space' To Normalise Rates

India's Monetary Policy Committee expects food inflation to relatively subside in the near future, with one of the members noting that this could provide the space to "normalise rates".

"...moderation in food inflation can be expected in Q4:2024-25 due to correction in vegetables prices, robust kharif harvest arrivals, a likely good rabi crop and adequate cereal buffer stocks," stated former Reserve Bank of India Governor Shaktikanta Das, who presided over his last MPC meeting before stepping down.

The expected easing of food prices in winter may provide the "turning point", according to RBI Deputy Governor Michael Patra.

The monetary policy stance is open to support growth, but it must await the ebbing of inflation on a durable basis "or else the uneven progress made so far in disinflation will get dissipated", added Patra, who voted in favour of maintaining a status quo.

The need of the hour is to be watchful of the forthcoming data to ascertain the projected improvement in the balance between inflation and growth outlook, RBI executive director Rajiv Ranjan stated in the MPC meeting.

"If food price pressures wane on projected lines, this would open up the policy space to normalise rates. Our neutral stance provides the flexibility to respond to the evolving situation," he, however, underlined.

The minutes of the meeting have been released around two weeks after the committee met. It was decided to keep the benchmark repo rate unchanged at 6.5%. However, to ease potential liquidity stress, cash reserve ratio was cut by 50 basis points to 4%.

The minutes of the meeting show that inflation remained a policy priority despite the fall in gross domestic product growth. The pace of GDP growth slowed to 5.4% in the July-September quarter, the slowest in nearly two years. On the other hand, inflation continues to remain above the MPC's target band of 4%, as it stood at 5.5% in November.

Das, at the MPC meeting, stressed that the gains achieved so far in the broad direction of disinflation need to be preserved, while closely monitoring the evolving outlook of both inflation and growth.

"The policy priority at this critical juncture has to be on restoring the inflation-growth balance," Das said, adding that the fundamental requirement now is to bring down inflation and align it with the target.

Lower inflation will enhance disposable income with households and increase their purchasing power, he explained, adding that such an approach would support consumption and investment demand. "Without addressing this core issue, it would not be possible to foster sustainable growth."

The fall in GDP growth reveal the corrosive power of repeated inflation shocks on economic activity, Patra said. The prospects for the second half of the year are brighter than the out-turn for the first half, he said, adding that efforts must be made to bring down inflation and revive consumption and investment spending.

The inflation readings for November and December are also expected to remain elevated, delaying the convergence of outcomes with the target, Patra said, adding that, "the fears of complacency due to sub-target outcomes for July and August are coming to roost."

What is worrying is that core inflation has edged up by 70 basis points from its July-low, Patra pointed out. There are early signs of of spillovers of high primary food prices. "Following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick," he added.

A durable reduction in inflationary pressures is necessary to "rekindle the impulses of growth in a sustained manner", Patra noted.

The inflation-growth balance "turned adverse" since the last MPC meeting in October, as inflation has "surprised on the upside", growth has also "surprised on the downside", Ranjan said, while pointing out that the last mile of disinflation is turning out to be trickier for many systemic and inflation-targeting countries. 

At this juncture, confirmation of durable softening of inflation in the coming months is important, the RBI executive director stated.