RBI’s Monetary Policy Committee Cautions Amidst Rising Inflation in December’s Review

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) convened in December for its routine review, with all six members expressing caution over the trajectory of food inflation. In a complex economic environment marked by the emergence of the JN.1 variant and other global uncertainties, the central bank maintained the status quo on both the repo rate and its policy stance. This article delves into the minutes of the MPC meeting, shedding light on the concerns raised by members and the rationale behind the decision to hold steady.

India’s retail inflation in November registered a notable increase, reaching 5.5%, the fastest pace in three months. This surge was primarily attributed to higher food prices, with food inflation accounting for nearly half of the overall consumer price basket. In November, food inflation stood at 8.70%, a significant jump from 6.61% in October. With food inflation expected to remain elevated in December, the MPC expressed apprehension about the potential impact on overall inflation.

RBI Governor Shaktikanta Das, in the meeting minutes, highlighted the persistent elevation of food inflation. While acknowledging a slight retreat from the highs seen in July, Das emphasized the need for vigilance, especially considering the likely resurgence of vegetable price inflation in the immediate months of November and December.

Deputy Governor M D Patra emerged as a more hawkish voice within the committee, expressing concerns about the vulnerability of inflation to food price spikes. Patra noted the spurt in momentum in daily data on key food items for November and early December, indicating heightened inflationary pressures. He urged a restrictive stance in monetary policy, emphasizing the necessity to remain on high alert.

Patra’s concerns were echoed by external member Rajiv Ranjan, who identified elevated food inflation as a major source of uncertainty for the inflation outlook. Another external member, Shashank Bhide, acknowledged food inflation as a short-term concern and advocated for continued policy support to steer inflation toward the target.

External members Ashima Goyal and Jayanth Varma raised the issue of high real interest rates in the context of approaching the inflation target of 4%. Goyal, who voted for maintaining both the rate and stance, emphasized the need to monitor the impact of expected food inflation over the next few months. She warned that repeated supply shocks could pose challenges.

Varma, while sharing similar concerns about high real interest rates, presented a specific call for recalibration. He suggested that nominal rates should be adjusted to bring down the real rate to 1.5% from the current 2%. According to Varma, the prevailing real interest rate of over 2% exceeds the optimal rate, and he argued for a neutral stance if one were deemed necessary.

In response to these concerns, Governor Das maintained a cautious yet pragmatic stance. While acknowledging the worries raised by the members, Das deemed any shift in policy stance at this juncture as premature and risky. He highlighted the ongoing impact of past rate hikes on the economy, advocating for a close monitoring of their full play out.

Das also addressed the view that real interest rates could be too high if inflation sustainably approaches 4% by the middle of 2024. However, he underscored the importance of not rushing into policy adjustments, especially with the recent rate hikes still influencing the economy.

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The minutes of the December MPC meeting provide insights into the complexities faced by the RBI in steering India’s monetary policy. With a focus on the cautionary approach, especially concerning food inflation and real interest rates, the central bank opted for stability. As the economy grapples with multiple challenges, including the impact of the JN.1 variant, the MPC’s decision reflects a careful balance between inflationary concerns and the need for sustained policy support.

In navigating these uncertainties, the RBI will likely continue to closely monitor economic indicators, global developments, and the evolving impact of the JN.1 variant. As the new year approaches, the central bank remains poised to adapt its policies as needed, striking a delicate balance to foster economic recovery while maintaining price stability.