MUMBAI: Majority of the six-member monetary policy committee (MPC) members called for caution on dropping guard against inflation fight given sticky food inflation that is slowing pace of disinflation, as per the minutes of the last MPC meetings released by the RBI on Friday.
In May, headline retail inflation eased to the lowest in a year at 4.75%, from 4.83% in April. It is still 75 bps over the median target of the MPC and the central bank.
“Food inflation is the main factor behind the grudgingly slow pace of disinflation. Recurring and overlapping supply-side shocks continue to play an outsized role in food inflation,” said RBI governor Shaktikanta Das at the last MPC meet which in a 4:2 votes decided to leave the key policy rates unchanged as also retained policy stance of withdrawal of accommodation.
Rajiv Ranjan, executive director of the RBI, said while core inflation has softened further, food inflation risks have remained elevated. The MPC includes governor Das who is the chairman of the panel, deputy governor Michael Debabrata Patra, external members Shashanka Bhide of the National Council of Applied Economic Research, Delhi; Ashima Goyal, ex-Indira Gandhi Institute of Development Research professor;
Jayanth R Varma of Indian Institute of Management, Ahmedabad; and Rajiv Ranjan, an executive director of Reserve Bank.
Of them, Das, Patra, Bhide, and Ranjan voted to keep policy repo rate unchanged at 6.5% and to remain focused on withdrawal of accommodation, while Goyal and Varma voted to reduce the policy repo rate by 25 basis points and for a change in the policy stance to neutral from the present withdrawal of accommodation.
Though headline inflation has been sequentially moderating since February, albeit in a narrow range from 5.1% in February to 4.8% in April, food inflation still remains elevated due to persistence of inflation pressures in vegetables, pulses, cereals, and spices.
Accordingly the MPC has forecast CPI inflation for FY25 at 4.5% with Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6%; and Q4 at 4.5%. Goyal voting for 25 bps rate cut said headline inflation has been around 5% since
January while core inflation has been below 4% since December 2023, which means volatile commodity prices, El Nino and heat waves have not been able to reverse the approach to target.
“The headline inflation projection of 4.5% for FY25 gives an average real repo rate of 2% implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged. Falling inflation has raised real repo above unity. This will reduce real growth rate with a lag,” she said.