MUMBAI: A majority of the six-member monetary policy committee (MPC) called for caution on dropping guard against the inflation fight, given the sticky food inflation that is slowing the pace of disinflation, according to the minutes of the last MPC meeting released by the RBI on Friday.
In May, headline retail inflation eased to the lowest in a year at 4.75 per cent, down from 4.83 per cent in April. However, it is still 75 bps above 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 meeting, which in a 4:2 vote decided to leave the key policy rates unchanged and also retained the policy stance of withdrawal of accommodation, according to the minutes.
External member Rajiv Ranjan, the executive director of the RBI, said that while core inflation has softened further, food inflation risks have remained elevated and warned against dropping guard on the inflation fight now.
The six-member 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 the Indian Institute of Management, Ahmedabad; and Rajiv Ranjan, an executive director of the Reserve Bank.
Of them, Das, Patra, Bhide, and Ranjan voted to keep the policy repo rate unchanged at 6.50 per cent and also to remain focused on the withdrawal of accommodation, while Goyal and Varma voted to reduce the policy repo rate by 25 basis points and also 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 per cent in February to 4.8 per cent in April, food inflation still remains elevated due to the persistence of inflation pressures in vegetables, pulses, cereals, and spices.
Accordingly, the MPC has forecast CPI inflation for FY25 at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent.
Goyal, voting for a 25 bps rate cut, said headline inflation has been around 5 per cent since January this year while core inflation has been below 4 per cent since December 2023, which means that volatile commodity prices, El Niño, and heat waves have not been able to reverse the approach to the target.
“The headline inflation projection of 4.5 per cent for FY25 gives an average real repo rate of 2 per cent, implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged. Falling inflation has raised the real repo above unity. This will reduce the real growth rate with a lag,” she said, adding, “Status quoism is praised as being cautious. But if doing nothing distorts real variables, it aggravates shocks instead of smoothing them and raises risk.”