RBI retained repo rate fearing more food-price shocks: MPC minutes

RBI Governor Shaktikanta Das and other members of the Monetary Policy Committee (MPC) opted for a status quo on the repo rate earlier this month fearing a second-round impact of food price shocks on overall inflation, minutes of the bi-monthly policy review meeting have revealed.

The Reserve Bank of India (RBI), in its last bi-monthly MPC meeting on August 8-10, decided to keep the repo rate (benchmark interest rate) unchanged at 6.5 per cent citing inflationary concerns, especially the spiralling prices of tomatoes and vegetables. Repo rate is the rate at which the RBI lends money to commercial banks.

All six MPC members, including MD Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma, and Rajiv Ranjan, voted for a status quo on the policy rate, according to the minutes of the meeting released by RBI on Thursday.

RBI’s task “still not over”

The latest Consumer Price Index (CPI) data, which was released after the review, showed that retail inflation soared to a 15-month high of 7.44 per cent in July. Also, for the first time in the current fiscal, retail inflation breached the RBI’s upper tolerance limit of 6 per cent.

The RBI has been mandated by the government to keep retail inflation at 4 per cent, with a 2 per cent margin on either side. According to the minutes of the MPC meeting, Das stressed that the RBI’s task of containing inflation was “still not over”.

“Given the likely short-term nature of the vegetable price shocks, monetary policy can look through the first-round impact of fleeting shocks on headline inflation. At the same time, we need to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to anchoring of inflation expectations,” Das argued.

He said inflationary pressures have emerged again, with inflation rising to 4.8 per cent in June on the back of rising food prices. He added that “headline CPI is expected to harden significantly in July-August, driven by the spike in tomato and other vegetable prices”.

Other members’ views

RBI Deputy Governor Patra expressed a similar opinion, saying that sustained easing of core inflation was crucial to the MPC’s objective of bringing inflation down to the target. “This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based,” he argued while voting for maintaining the status quo on the policy rate and persevering with the withdrawal of monetary policy accommodation.

While unanticipated and short-lived supply-demand mismatches lie outside the realm of monetary policy, Patra said, “the commitment to price stability requires the RBI to see off these price perturbations by guarding against spillovers — in India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation.”

RBI Executive Director Rajiv Ranjan said, “Our job is not yet fully over,” stressing that “costs of high inflation regime are simply too high to take any chances”.

According to independent member Bhide, “while the spikes in prices of a few commodities may not lead to persistent overall price pressures, broadening of price pressures would be a concern.”

Another independent member, Goyal, said since liquidity was in surplus, the policy needed to signal continuing watchfulness towards bringing inflation to the target level.

Varma, another independent MPC member, voted for keeping the repo rate unchanged, arguing that the current level was high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.