NEW DELHI: The Reserve Bank of India’s six-member Monetary Policy Committee, which met for the
last time in its four-year tenure earlier this month, found the spike in consumer inflation so alarming that it chose to delay action to address the “deepest contraction in history.” Minutes of the MPC meet released on Thursday showed the elevated inflation reading pushed the committee members to vote for a status quo. RBI kept the repo rate unchanged at 4% after an unconventional 115 bps cut since March to contain the Covid-19 pandemic.
“The generalised inflationary pressures across food and CPI excluding food and fuel, in a situation where growth is expected to contract sharply, is a matter of serious concern,” wrote RBI Governor Shaktikanta. He went on to note that the slack in the economy indicates that there is little risk to inflation from the demand side. However, the supply-side disruptions and bottlenecks in the post-Covid 19 environment could engender these inflationary impulses, he added.
MPC members, however, felt there was room for monetary policy support and that they would support such a move when needed. Retail inflation rose to 6.93 per cent in July on account of higher food prices, breaching the banking regulator’s upper tolerance level of six per cent for two consecutive months. The print for June was also revised to 6.23% from 6.09%.
Amid the high uncertainty in the near-term inflation outlook, two outcomes are possible based on precedents, noted RBI Deputy Governor Michael Patra. One, food inflation could “fall off a cliff” in August after an initial rise, like in 2016-17. Or, like in 2009-10, inflation could surge in the backdrop of a failed monsoon, inflationary pressures and a delayed monetary policy response.