Slow pace of disinflation is mainly due to the elevated food inflation which has been impacted by recurring supply-side shocks, RBI Governor Shaktikanta Das said in the minutes of the Monetary Policy Committee (MPC) meeting held from June 5 to 7.
Of the six-member rate setting panel, four voted to keep the policy repo rate unchanged at 6.5 per cent and policy stance as withdrawal of accommodation as higher food inflation is affecting disinflation process.
Two external members of the MPC – Ashima Goyal and Jayanth Varma, however, voted for a 25 basis points cut in the repo rate as higher interest rates could hurt growth. They also voted to change the policy stance to neutral from withdrawal of accommodation.
Das said headline consumer price-based inflation is moderating but at a very slow pace. Headline inflation has moderated by around 30 basis points (bps) from 5.1 per cent in February 2024 to 4.8 per cent in April 2024. In May 2024, inflation softened to 4.7 per cent and food inflation remained unchanged at 7.9 per cent.
“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,” Das wrote in the minutes.
In the monetary policy, Das voted for keeping the policy repo rate unchanged at 6.5 per cent and to continue with the stance of withdrawal of accommodation.
“With persistently high food inflation, it would be in order to continue with the disinflationary policy stance that we have adopted. Any hasty action in a different direction will cause more harm than good,” he said.
It is important that inflation is durably aligned to the target of 4 per cent, the Governor said, adding that price stability is the bedrock for high and sustainable growth.
Going forward, the baseline projections show inflation moderating to an average 4.5 per cent in 2024-25. In the immediate months, however, the impact of exceptionally warm summer months on output of certain perishables; a likely rabi production shortfall in some pulses and vegetables – particularly potatoes and onions; and the upward revisions in milk prices, warrant close monitoring, Das said.
On economy, the Governor said domestic growth outlook for 2024-25 remains upbeat as economic activity continues to maintain momentum. The RBI has projected real gross domestic product (GDP) at 7.2 per cent in the current financial year.
RBI Deputy Governor Michael Patra, who voted for keeping the policy rate and the stance of withdrawal of accommodation unchanged, said the speed of the easing of inflation has been disappointing so far, even from a cross-country perspective.
“The Indian economy remains hostage to intersecting food price shocks. Their repetitive occurrence calls for intensifying monetary policy vigil to ward off spillovers to other components of inflation and to expectations,” he said.
MPC member Ashima Goyal said the experience of the past year shows supply shocks no longer have persistent effects on inflation or on inflation expectations.
“We have waited for one year to watch the impact of these shocks, now it is time to move on,” Goyal wrote in the minutes.
A durable approach to the inflation target is consistent with a transient rise in inflation, she said. It is necessary to avoid the mistake of 2015 when international crude oil prices fell substantially but the fear that they would rise again prevented an adequate cut in the policy rate.
“Real interest rates rose substantially and hurt growth,” Goyal said.
Jayanth Varma said that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well.
Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75 per cent, and lower than the potential growth rate (of say 8 per cent) by more than 1 per cent.
“This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5 per cent above target, and core inflation is extremely benign,” Varma said.
MPC member Rajiv Ranjan said headline and core inflation have moderated on anticipated lines. There is, however, little comfort in the near-term with inflation projected to remain sticky at around 4.9 per cent in Q1 of FY2024-25.
“While we can draw some comfort from headline inflation running within the tolerance band successively for eight months in a row, we cannot drop our guard as the headline inflation is still not aligned to the target,” Ranjan said. Repeated incidence of food price shocks is delaying the final descent of inflation to the target, he said.
According to Shashanka Bhide, the moderate inflation rate will have to be durable to be an effective condition for sustained growth. In this context, the policy would have to continue its focus on maintaining the inflation rate aligned to the target over the medium term. He also voted for keeping policy rate unchanged at 6.5 per cent and keeping policy stance as withdrawal of accommodation.
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