Monetary Policy Committee Minutes: Making The Case For No Immediate Rate Cuts

Earlier this month, India's Monetary Policy Committee kept the benchmark repo rate unchanged for the seventh straight meet at 6.5%. The committee's minutes continue to reaffirm the commitment to bringing retail inflation to target, amid favourable economic growth.

This success in the disinflation process should not distract from the vulnerability of the inflation trajectory to the frequent incidences of supply-side shocks, especially to food inflation, due to adverse weather events and other factors, RBI Governor Shaktikanta Das said, in the minutes published on Friday.

Overlapping food price shocks, apart from imparting volatility to headline inflation, may also result in spillover to core inflation, he cautioned. Lingering geopolitical tension and their impact on commodity prices and supply chains are also adding to uncertainties in the inflation trajectory. "These considerations call for monetary policy actions to tread the last mile of disinflation with extreme care."

The gains in disinflation achieved over the last two years have to be preserved and taken forward, towards aligning the headline inflation to the 4% target on a durable basis, he said. "The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability," Das said. "Price stability is our mandated goal and it sets strong foundations for a period of high growth," he added.

Recent inflation prints and high frequency data on salient food prices indicate that food inflation risks remain elevated, Deputy Governor Michael Patra said. A relatively shallow and short-lived winter trough is giving way to a build-up of price momentum as summer sets in, with forecast of rising temperatures up to May.

The headroom provided by the steady core disinflation and fuel price deflation does not assure a faster alignment of the headline with the target, Patra said. Consequently, headline inflation can be expected to remain in the upper reaches of the tolerance band until favourable base effects come into play in the second quarter of FY25. "Hence, conditions are not yet in place for any let-up in the restrictive stance of monetary policy."

"Overall, price stability has to be restored in order to ensure that the rising growth trajectory that India is embarking upon is sustained," he said.

While monetary policy seems to be on the right track, it is too early to ease guard against inflation, Executive Director Rajiv Ranjan said. It is important that we gain more confidence on our macro numbers for FY25 and their nuances, he said.

Few months into the year, there will be clarity on monsoon and its spatial distribution, impact of expected hot weather in the current quarter, rabi production and procurement and kharif sowing, all of which are critical to shape up the growth-inflation balance in FY25, Ranjan explained.

Crude outlook is fast changing, with the evolving perceptions on demand-supply, in line with the geopolitics and developments in West Asia, which is on the edge. Besides, led by global developments, input prices are showing signs of an uptick, which needs to be watched, he said.

“Return of inflation to the 4% target is our objective and having come this far, it is not far from sight. We need to utilise the space provided by stronger growth to focus on inflation.”

“Despite an uptick in crude oil prices, the outlook for inflation continues to be benign, and I remain convinced that a real interest rate of 1-1.5% would be sufficient to glide inflation to the target of 4%,” External Member Jayanth R Varma said. The current real policy rate of 2% (based on projected inflation for FY25) is therefore excessive, he said.

This unwarranted high real rate imposes significant costs on the economy because of the short run Phillips curve, according to him. The fact that economic growth in FY25 is projected to slow by over half a percent relative to FY24 is a reminder that high interest rates entail a growth sacrifice, Varma said. "Monetary policy should try to reduce this sacrifice while ensuring that inflation remains within the band and glides towards the target."