Reassuring resolve: On the RBI’s Monetary Policy Committee’s move
Growth can only be tenuous if retail inflation is unchecked
The RBI’s Monetary Policy Committee (MPC) has for a ninth straight meeting chosen to keep benchmark interest rates unchanged as it continues to battle retail inflation that has stubbornly stayed above its medium-term target of 4% for 57 months and is beginning to undermine consumer confidence. Laying out the rationale, RBI Governor Shaktikanta Das was emphatic that there was no room for complacency given the risks that persistently elevated food price pressures posed to households’ inflation expectations and broader monetary policy credibility. Elevated food prices, he stressed, had not only slowed disinflation in the April-June quarter but had also extended their momentum into July with high frequency food price data pointing to sizeable month-on-month increases in key vegetable prices. Citing Department of Consumer Affairs data, he said tomato prices had surged 62% sequentially, while onion had become almost 23% costlier than in June and potato prices had increased 18%. Food prices, with a weight of about 46% in the overall Consumer Price Index, could not afford to be overlooked, not just for their impact on headline inflation but far more significantly because consumers related the most to the impact food prices had on monthly household budgets. He indicated, without explicitly referencing it, that a suggestion in the Economic Survey urging policymakers to consider delinking food prices from the inflation targeting framework made little sense in the circumstances.The MPC, which voted by a 4-2 majority to hold interest rates and keep the policy stance focused on the withdrawal of accommodation to ensure that inflation aligns to the target, also raised its projection for headline retail inflation in the July-September quarter to 4.4%, 60 basis points higher than the 3.8% pace projected in June. The rate panel also posited slightly faster inflation in the third fiscal quarter than it had forecast previously, lifting the projection by 10 basis points to 4.7%, in a clear sign that the near-term inflation outlook appears less reassuring than it did just two months ago. And while Mr. Das noted that, in June, vegetable prices had contributed about 35% to headline inflation, the Centre for Monitoring Indian Economy, in an analysis, forecast price pressures in vegetables to ‘sustain well into the festive season through till early November’, adding pressure on retail headline inflation. Core inflation may also have bottomed out according to the MPC, which flagged the risks of spillover from food prices, as well as the impact mobile tariff revisions may have on broader non-food inflation. Policymakers hearteningly reiterated the truism that without ensuring enduring price stability, growth may at best be tenuous.