Core inflation warrants rate action: MPC’s majority view

While the effects of monetary policy actions taken so far will bring inflation below 7% levels and contain it in the 5-6% range in 2023, inflation can be expected to remain above target over the next 12 months, he said.

Written by Shashank Didmishe

December 22, 2022 02:15 IST

inflation, cpi inflation, economy, monetary policy,

“Core inflation remains unyielding and diffused with a rising price momentum as it tests the upper tolerance band on its own, warranting resolute monetary policy resolve to quell it,” Patra said.

The persistence in the core inflation is a matter of concern and there is no room for complacency when it comes to monetary policy tightening, according to majority members of Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI). Core CPI, which excludes food and fuel, from retail inflation has remained at elevated levels of 6%.

“There is no room for complacency and the battle against inflation is not over. This necessitates a constant vigil on prices,” Shaktikanta Das, governor, RBI, said in the minutes of the MPC meeting held between December 5-7.

Das recommended further calibrated monetary policy action owing especially to the stickiness in the core inflation to keep inflation expectations anchored and bring inflation closer to the target rate of 4% in the medium term.

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Other than Das, Michael Patra, deputy governor RBI; Shashanka Bhide, honorary senior advisor, NCAER, and Rajiv Ranjan, executive director, RBI, have cited core inflation as a major cause of worry. The four members of the MPC voted in favour of 35 bps rate hike and continuation of withdrawal of accommodation stance.

“Core inflation remains unyielding and diffused, with a rising price momentum as it tests the upper tolerance band on its own, warranting resolute monetary policy resolve to quell it,” Patra said.

Also Read: Mixed bag: CPI inflation below 6%, IIP shrinks

While the effects of monetary policy actions taken so far, will bring inflation below 7% levels and contain it in the 5-6% range in 2023, inflation can be expected to remain above target over the next 12 months, he said.

Ashima Goyal, who has voted in favour of 35 bps rate hike but against the continuation of stance, said that the prices of transport, communication and clothing, which are dominant factors in core inflation, are easing. The persistence in core inflation is due to multiple supply shocks more than to second round effects, she said. While a smaller rate hike of 25 bps would have sufficed, according to Goyal, the MPC should definitely move to a neutral stance, where movement can be data-based in any required direction, as new information affects forward projections, she said.

Lastly, Jayanth Varma, professor, IIM, Ahmedabad, reiterated his view that the rate hike and continuation of stance is not warranted in light of reduced crude oil prices and easing of supply side shocks arising from pandemic and geopolitical tensions. At domestic level, lower corporate profitability, households’ expectations of inflation along with concerns over slowdown in growth have made the case for easing of the monetary policy, he said.

This article was first uploaded on December twenty-two, twenty twenty-two, at fifteen minutes past two in the night.