The MPC members maintained status quo -- but minutes of the meeting show that they did not rejoice the fact that vegetable prices in the country were cheaper.
As inflation softened, the Reserve Bank of India (RBI) decided against raising the repo rate in the first monetary policy meeting of the financial year 2018-19. The MPC members maintained status quo — but minutes of the meeting show that they did not rejoice the fact that vegetable prices in the country were cheaper.
Reason: Vegetable prices are highly volatile, and largely a “noise” subjugating other more persistent components of the headline inflation, which have, on the contrary, strengthened in February.
“Does it present a persuasive case for an easier/neutral monetary policy stance?” asked Michael Debabrata Patra, the sole member that voted for a hike in repo rate by 25 basis points. “It is important to recognise that volatility in the prices of vegetables is obscuring a clearer evaluation of underlying inflation pressures.”
And this was not Michael Patra’s assessment alone. Deputy governor Viral Acharya said that he has “moved closer to switching from the neutral stance to begin the process of withdrawal of accommodation” as the central bank needed to separate “signal” (food and fuel prices) from “noise” (vegetable prices) in the data.
Viral Acharya explained that vegetable prices eased but not due to durable supply management, instead due to seasonality. He suggested that the lower vegetable price is “likely to, and typically does, revert”.
“I view the risks as tilted significantly to the upside given the continuing rise in the ex-food-and-fuel inflation. Besides oil prices, my another primary concern is the risk of fiscal slippages, at both the Centre and State levels,” he said.
Food inflation declined by 120 bps in February, pulled down by a sharp decline in vegetable prices, especially of onions and tomatoes, along with continuing deflation in pulses. The fall in prices was also observed in other food components such as eggs, sugar, meat and fish, oils, spices, cereals and milk, the RBI said in the April policy statement.
“Despite the recent fall in headline inflation, several upside risks prevail,” said Pami Dua. RBI governor Urjt Patel too said that despite lower headline inflation trajectory in the first half of FY19, inflation expectations have firmed up, both for three-month and one-year ahead horizons, emancipating from the impact of higher MSP, higher crude oil price to fiscal slippage.
The RBI kept the repo rate unchanged at 6% for the fourth time with the neutral stance in the April policy meeting.