Possible 2nd round shock of food price rise on inflation prompted RBI to keep repo unchanged: MPC minutes

A possible second-round impact of food price shocks on overall inflation prompted Reserve Bank Governor Shaktikanta Das and other members of the Monetary Policy Committee (MPC) to opt for the status quo on the benchmark interest rate at the bi-monthly policy review earlier in the month.

The 44th session of the Monetary Policy Committee (MPC) of the RBI, which concluded on August 10, 2023, decided to retain the policy repo rate within the liquidity adjustment facility (LAF) at 6.50 percent.

The standing deposit facility (SDF) rate and the marginal standing facility (MSF) rate, along with the bank rate, remained unchanged at 6.25 percent and 6.75 percent, respectively.

All six members of the MPC, including M.D. Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma and Rajiv Ranjan, voted for the status quo on the policy rate.

The decision comes in light of the MPC's comprehensive review of various factors affecting the Indian economy, including consumer confidence, inflation expectations, corporate sector performance, credit conditions, and the outlook for various sectors.

The committee also delved into the macroeconomic projections put forth by its staff and evaluated alternate scenarios involving potential risks to the economic outlook.

Speaking about the decision, the RBI governor addressed the concerns about inflation and its potential impact on the economy. He acknowledged that headline inflation had temporarily eased, citing a drop from 6.2 percent in the previous quarter to 4.3 percent in May 2023. This decline was attributed to a combination of monetary tightening measures and efforts to augment supply.

However, he expressed caution about the resurgence of inflationary pressures, particularly a rise to 4.8 percent in June due to increasing food prices.

"Inflationary pressures are, however, emerging again with inflation rising to 4.8 percent in June on the back of rising food prices."

"Headline CPI is expected to harden significantly in July-August, driven by the spike in (prices of) tomato and other vegetables. The data available from the Comptroller and Auditor General of India (CAG) for 20 states indicates that capital expenditure of the states increased sharply by 74.4 percent during Q1 2023-24 aided by the Union government's 'Scheme for Special Assistance to States for Capital Investment.' As on July 25, 2023, the central government has approved expenditure amounting to Rs 84,884 crore accounting for 65.3 percent of the Rs 1.3 lakh crore budgeted for 2023-24 prices," he said.

Das explained that while certain factors driving food price increases, such as the spike in tomato and vegetable prices, were expected to correct swiftly with the arrival of fresh crops — risks stemming from El Nino conditions, volatile global food prices, and uneven monsoon distribution required vigilant monitoring.

"In the non-food category, crude oil prices have firmed up reflecting tighter supply conditions. Against this backdrop, supply side measures need to be continued to prevent the spiraling of frequent food supply shocks into generalised economy-wide price impulses," he informed.

Das also touched on the evolving global economic environment, characterised by uncertainty and volatility in financial conditions, with many major economies facing above-target inflation. He praised India's economic resilience, stating that the country was emerging as a new growth engine despite the challenges.

Regarding India's economic performance, Das highlighted positive indicators, including the expansion of the manufacturing sector, strong services activity, improved rural consumption, and robust investment activity supported by government capital expenditures.

"The economy is largely evolving on expected lines. The total acreage under kharif crops has crossed last year’s levels. The manufacturing sector continued to expand, supported by moderating input cost pressures. Services activity remained strong in Q1 2023-24 and it is likely to follow through during the remaining period of 2023-24. 57. Rural consumption has shown signs of improvement in Q1 2023-24 while urban consumption has remained stable," Das said.

He emphasised that the growth drivers in sectors like iron and steel, automobiles, petroleum, metals, and chemicals were expected to contribute to a projected real GDP growth rate of 6.5 percent for 2023-24 and 6.6 percent for Q1 of 2024-25.

Das acknowledged that headline inflation had softened compared to the previous year but noted that it still remained above the target range. He pointed out that while the initial impact of temporary food price shocks could be overlooked, the RBI needed to be prepared to counter any potential secondary effects on broader inflation and inflation expectations.

He stated that the RBI would continue assessing the impact of past actions and incoming data to make necessary adjustments to monetary policy whenever deemed necessary.