RBI MPC Minutes: Price stability to set foundation of high growth, food inflation risk elevated; 5 key highlights

The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Friday, April 19, highlighting that the policy must continue to be actively disinflationary to ensure anchoring of inflation target and fuller transmission. The RBI's rate-setting panel believes that durable price stability would set strong foundations for a period of high growth.

On future indicators, the central bank said in its statement today unpredictable supply side shocks from adverse climate events and their impact on agricultural production as also geo-political tensions and spillovers to trade and commodity markets add uncertainties to the outlook. 

The RBI at its last bi-monthly MPC meeting on April 5 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. All six members including Dr. Michael Debabrata, Shashanka Bhide, Ashima Goyal, and Rajiv Ranjan voted for status quo on the policy rate for the seventh consecutive time, except Jayanth R Varma.

Also Read: RBI monetary policy: Rates remain unchanged, growth outlook bright; 5 key highlights of RBI MPC outcome

RBI MPC Minutes: Here are the five key highlights-

1.Growth gives policy space to focus on price stability: RBI Governor

RBI Governor Shaktikanta Das said that the success in the disinflation process should not distract us 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. 

Overlapping food price shocks, apart from imparting volatility to headline inflation, may also result in spillovers to core inflation. Lingering geo-political tensions and their impact on commodity prices and supply chains are also adding to uncertainties in the inflation trajectory, according to Das.

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‘’The extant monetary policy setting is well positioned. Monetary policy transmission is continuing and inflation expectations of households are also getting further anchored. At this stage, we should stay the course and remain vigilant. The gains in disinflation achieved over last two years have to be preserved,'' said the RBI Governor. 

‘’The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability. Price stability is our mandated goal and it sets strong foundations for a period of high growth,'' added Das.

2.Conditions not in place for let-up in restrictive stance of MPC: RBI Dy Governor

Recent inflation prints and high frequency data on salient food prices indicate that food inflation risks remain elevated. A relatively shallow and short-lived winter trough is giving way to a build-up of price momentum as summer sets in, with forecasts of rising temperatures up to May'24, according to Dr Patra.

The headroom provided by the steady core disinflation and fuel price deflation does not assure a faster alignment of the headline with the target. 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 2024-25. 

‘’Conditions are not yet in place for any let-up in the restrictive stance of monetary policy. Downward pressure on inflation must be maintained until a better balance of risks becomes evident and the layers of uncertainty clouding the near-term clear away,'' said RBI Deputy Governor Dr. Michael Debabrata Patra.

‘’The external balance sheet is strong, with a modest current account deficit, ebullient capital flows and rising foreign exchange reserves. This should insulate domestic economic activity from global spillovers in response to regime shifts in monetary policy stances of systemic central banks that are either underway or imminent, added Dr Patra.

3.Climate shocks pose key upside risk to food inflation

The MPC said that going ahead, food price uncertainties would continue to weigh on the inflation outlook. An expected record rabi wheat production in 2023-24, however, will help contain cereal prices. Early indications of a normal monsoon augur well for the kharif season. 

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On the other hand, the increasing incidence of climate shocks remains a key upside risk to food prices. Low reservoir levels, especially in the southern states and outlook of above normal temperatures during April-June, also pose concern. Tight demand supply conditions in certain pulses and the prices of key vegetables need close monitoring, said the central bank.

‘’Food inflation remained a hostage to vegetable prices due to shallower winter season price correction, which could linger due to the likely above normal temperatures during the summer,'' said MPC member Dr. Rajiv Ranjan.

4.High-interest rates sacrifice growth, says MPC member

Professor Jayanth R Varma had voted to reduce the repo rate by 25 basis points in the policy meeting held earlier this month. ‘’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 per cent would be sufficient to glide inflation to the target of four per cent,'' said Varma.

The current real policy rate of two per cent (based on projected inflation for 2024-25) is therefore excessive. This unwarrantedly high real rate imposes significant costs on the economy because of the short run Phillips curve. 

‘’The fact that economic growth in 2024-25 is projected to slow by over half a percent relative to 2023-24 is a reminder that high interest rates entail a growth sacrifice. Monetary policy should try to reduce this sacrifice while ensuring that inflation remains within the band and glides towards the target'', said Varma.

5.Inflation, GDP forecasts for 2024

The real gross domestic product (GDP) growth for 2024-25 is projected at seven per cent with Q1 at 7.1 per cent; Q2 at 6.9 per cent; Q3 at 7.0 per cent; and Q4 at seven per cent. The retail inflation for 2024-25 is projected 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, according to the central bank. 

‘’While the projected inflation trends point to further moderation in inflation rate in 2024-25, they also indicate an upturn well above the target rate of four per cent in the second half of the year. Given the strong momentum of growth at this juncture, it is necessary to maintain monetary policy focus on aligning the inflation trends with the target,'' said MPC member Dr. Shashanka Bhide.

The next meeting of the MPC is scheduled during June 5 to 7, 2024.