Inflation is gradually trending down, but the slow and uneven pace means alignment with the 4% target is still some distance away, Reserve Bank of India governor Shaktikanta Das said in the minutes of the monetary policy meeting released on Thursday. With food inflation pressures showing little signs of easing in the near term, and household inflation expectations picking up, monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components.
“Inflation is gradually trending down, but the pace is slow and uneven. Durable alignment of inflation to the target of 4% is still some distance away. Persistent food inflation is imparting stickiness to headline inflation,” said Das.
The RBI at its last bi-monthly monetary policy committee (MPC) meeting on August 8 decided to keep the repo rate unchanged at 6.5% for the ninth consecutive time. MPC members Ashima Goyal and Jayanth Varma voted to reduce the repo rate by 25 basis points and change the stance to neutral. The remaining four members voted to maintain the status quo on the policy rate for the ninth consecutive time.
The governor said that the calibrated increase in policy repo rate by 250 basis points since May 2022 and the subsequent change of stance to the withdrawal of accommodation has facilitated gradual disinflation over 2022-23. “With a forecast of 4.5% headline inflation for 2024-25, the present policy repo rate is broadly in balance and avoids costly sacrifice of domestic economic activity,” said Das.
India’s retail inflation fell in July to a near five-year low of 3.54%, as food inflation eased from previous highs due to a base effect, while core inflation continued to hover around record low levels of around 3%. “Core inflation might just have bottomed out,” Das said.
He said that when durable disinflation to the target is still a work in progress, the issue of equilibrium natural interest rate is premature.
“Policymaking in the real world cannot be based on an abstract, theoretical and model-specific construct, which is unobservable and time-varying. Hence, any justification for policy easing based on so-called high real rates can be misleading,” Das said.
Deputy governor Michael Patra said persistently rising prices are a reflection of too much demand chasing too less supply even if it is a supply shortfall that starts the price spiral, and it is the remit of monetary policy to adjust demand conditions to the state of supply.
“Potential output is now rising faster than its pre-pandemic pace; even so, a positive output gap has opened up – actual output is running ahead of potential output – warranting vigil on aggregate demand developments,” Patra said.
He noted that the wedge between headline and food inflation has been widening, and stalling the alignment of the former with the target. “The MPC of the RBI has committed to align inflation durably to the target. That has not yet been achieved; any faltering from this commitment could undermine the prospects of the Indian economy,” Patra said.
Varma said, on a forward looking basis, the current repo rate of 6.5% translates into a real rate of 2.1% which is well above what is required to drive inflation to its 4% target.
“For the last several meetings, I have been expressing concerns about the unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive. The majority of the MPC however do not share this concern, perhaps because they think that the Indian economy is already growing at close to its potential growth rate,” Jayanth Varma
He added that such a view reflects an unwarranted pessimism about the growth potential of the economy and, an overly sanguine expectation about growth in ensuing quarters.
External member Ashima Goyal cautioned that while inflation is on a downward trend, there are some negative signals for Indian growth also.
“Since Indian inflation is not well measured, and could be over or under-estimated, too much precision with regard to a target is unproductive,” Goyal said.
RBI executive director and MPC member Rajiv Ranjan said that at the current juncture, more clarity and definiteness are needed regarding food inflation, domestic demand and global risks.
“At the current juncture, however, more clarity and definiteness are needed – on food inflation outlook; spillovers of food price pressures to core inflation; domestic demand; and global risks,” said Ranjan. “Till then, I will prefer to stay the course and remain cautious and watchful for these uncertainties to play out,” he added
