Indians and even Indian policymakers have hardly ever witnessed food deflation. The recent collapse in food prices caught them off-guard and the surprise was visible in the minutes of the latest monetary policy committee meeting. All six members of the committee stated that the food deflation was a surprising development, which made headline retail inflation undershoot previous forecasts of the Reserve Bank of India (RBI).

Recall that the central bank had already cut inflation forecasts once, and it had to prune it once more in the December meet. As member Ravindra Dholakia observed, RBI’s inflation forecast is down a whopping 120 basis points. One hundred basis points equal one percentage point.

Dholakia added that these downward revisions show that the impact of drop in food prices and oil prices could be long-term in nature. “If there is no policy action in response to such a major favourable shock, MPC would run the risk of being considered neither current nor relevant!," he said. According to him, RBI may have tied its own hands by changing the policy stance to calibrated tightening prematurely.

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Analysts are already expecting the stance to be changed back to neutral in the next meeting in February.

Other members echoed this view as far as food inflation was concerned. But the policy committee members seemed to indicate that the food price fall is too good to be true and could reverse quickly.

Michael Patra, in charge of monetary policy at RBI and a known hawk, said that the food deflation is a result of supply shocks which would dissipate soon.

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“I reiterate that although softer inflation prints could likely lull inflation expectations, abundant precaution and decisiveness in quelling risks to the target are warranted if the hard-earned gains in terms of macroeconomic stability and credibility are to be preserved," Patra said.

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Deputy governor Viral Acharya and former governor Urjit Patel both batted for caution on data and said that recent volatility makes it difficult to forecast the inflation trajectory in the coming months.

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Members seemed sanguine on growth and the RBI top brass flagged off concerns over fiscal slippage given elections next year.

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Patel termed the fiscal risk as a shock amplifier than a shock absorber. Barring Dholakia, all members felt that a calibrated tightening stance was appropriate given uncertainties over global oil prices and a fast closing domestic output gap.

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