‘The elephant in India is the monsoon’: MPC’s Dr Michael Patra on current spike in India’s headline inflation

  • ‘’The elephant in India is the monsoon, with August shortfalls rendering the outlook uncertain in the shadow of El Niño effects even as Indian Ocean dipole conditions are turning positive,'' said the MPC member in the latest MPC minutes.

Edited By Nikita Prasad
First Published25 Aug 2023, 05:37 PM IST
Reserve Bank of India RBI Building, Sansad Marg;17/09/2012; Photo: Pradeep Gaur/Mint
Reserve Bank of India RBI Building, Sansad Marg;17/09/2012; Photo: Pradeep Gaur/Mint

The Reserve Bank of India (RBI) released the minutes of its latest Monetary Policy Committee (MPC) meeting, in which the central bank's Deputy Governor Dr Michael Debabrata Patra highlighted that India faces the onslaught of overlapping localised supply shocks, which are causing price-sensitive food items in the consumer price index (CPI) to spike and push up headline inflation. 

‘’The elephant in India is the monsoon, with August shortfalls rendering the outlook uncertain in the shadow of El Niño effects even as Indian Ocean dipole conditions are turning positive,'' said the MPC member in the latest MPC minutes released on Thursday.

The uneven progress of the monsoon manifesting in the form of excess rains in the north west regions and disrupting supply, and deficient rains in the eastern part delaying crop sowing, according to the MPC members.

The RBI at its last bi-monthly MPC meeting on August 10 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. All six members including M D Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma and Rajiv Ranjan voted for status quo on the policy rate.

The minutes of the meeting highlighted that India's headline inflation is likely to witness a spike in the near months on account of supply disruptions due to adverse weather conditions. There are risks from the impact of the skewed south-west monsoon so far, a possible El Niño event and upward pressures on global food prices due to geopolitical hostilities, according to the rate-setting panel.

Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals. ‘There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring,’' said RBI.

Dr Patra explained that the central bank's surveys suggest that households’ inflation perceptions have been impacted by the current food price developments – which is also reflected in consumer perceptions regarding the price level and inflation – but they should stabilise over the year ahead as supply conditions improve. 

‘’A risk to the inflation outlook stems from the liquidity overhang in the banking system. Withdrawal of excess liquidity should engage primacy in the attention of the RBI going forward as it presents a direct threat to the RBI/MPC resolve to align India’s inflation with the target, besides the potential risks to financial stability,'' said Dr Patra.

While unanticipated and short-lived supply demand mismatches lie outside the realm of monetary policy, the commitment to price stability requires the RBI to see off these price perturbations by guarding against spillovers – in India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation, according to the RBI's Deputy Governor.

‘’Ensuring the sustained easing of core inflation is crucial to the MPC’s objective of bringing inflation down to the target. This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based'', he added.

India's consumer price index (CPI) inflation surged sharply to a 15-month high peak of 7.44 per cent in July 2023, driven by high food and vegetable prices. July CPI print had breached the RBI's upper tolerance limit of 6 per cent for the first time in five months.

The consumer food price index (CFPI) in July also surged to 11.51 per cent - the highest level since October 2020, according to data released by the Ministry of Statistics and Programme Implementation earlier this month.

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First Published:25 Aug 2023, 05:37 PM IST
HomeEconomy‘The elephant in India is the monsoon’: MPC’s Dr Michael Patra on current spike in India’s headline inflation

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