Economy

Published: October 23, 2023
Updated: October 23, 2023

RBI MPC Minutes: Focus on Disinflation Amid Rising Inflation

The Reserve Bank of India (RBI) has unveiled the minutes of the Monetary Policy Committee (MPC) meeting, shedding light on the current inflation situation. The committee acknowledges that India's headline inflation has exceeded the tolerance band and is diverging from its target. As a result, the central bank is committed to maintaining an actively disinflationary monetary policy.

Inflation Challenges:

The MPC has identified that unexpected food price shocks are influencing the inflation trajectory. Consequently, the committee has resolved to remain highly vigilant, given the ongoing global food and energy price spikes and financial market volatility.

Recent Policy Decision:

During its last bi-monthly MPC meeting on October 6, the RBI opted to maintain the benchmark interest rate (repo rate) at 6.5%. All six MPC members voted in favour of this decision, highlighting their concern about inflationary pressures. Additionally, they emphasized their commitment to achieving a gradual alignment of inflation with the target while supporting economic growth.

Inflation Outlook and Factors:

The near-term inflation outlook is anticipated to improve, thanks to corrective movements in vegetable prices and the recent reduction in liquefied petroleum gas (LPG) costs. However, the inflation trajectory will be influenced by several variables, including sowing area for pulses, reservoir levels, El Niño conditions, and the volatility of global energy and food prices.

Economic Resilience and Challenges:

Despite the challenging global environment, India's domestic economic activity has demonstrated resilience, with growth projections of 6.5% for 2023-24. The private sector is accelerating investment as input cost pressures ease. This favourable economic environment has been fostered by prudent policy measures to address multiple shocks and ensure economic stability.

Concerns About Inflation and Monetary Policy:

Inflationary pressures have been evident during July and August, primarily due to surges in vegetable prices, highlighting the vulnerability of headline inflation to recurring food price shocks. However, one positive aspect has been the decreasing core inflation, supported by cost-related factors and the transmission of previous monetary policy actions.

RBI's Commitment to Inflation Control:

The RBI's primary objective remains achieving a 4% inflation target and anchoring inflation expectations. The cumulative policy repo rate increase of 250 basis points is still impacting the economy. Thus, while the MPC has retained the policy repo rate at 6.50%, it remains prepared to take timely policy actions if circumstances require.

Continued Vigilance:

The central bank asserts that monetary policy must remain highly vigilant and ready to respond as needed. The hard-won macroeconomic stability must be safeguarded.

Monitoring Inflation and Growth:

MPC members recognize that taming inflation is crucial for fostering sustainable growth. Projections suggest that growth will gain momentum from the second quarter. However, vigilance remains essential, as inflation still exceeds 5% in the final three quarters of this fiscal year.

Consistency in Policy Communication:

While most MPC members support the current stance, one member highlights the importance of aligning words with actions. Clear communication on maintaining high real interest rates for an extended period is crucial.

Next MPC Meeting:

The next MPC meeting is scheduled for December 6-8, 2023.

The RBI's commitment to controlling inflation and ensuring macroeconomic stability remains at the forefront of its monetary policy. As inflationary pressures persist, the MPC emphasises the need for vigilance and timely action. The upcoming meetings will continue to focus on achieving inflation targets while supporting India's economic growth.