All six members of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) expressed caution over food inflation during the December review, while two external members warned about high real interest rates as headline inflation approaches its target of 4 per cent.
The central bank continued to maintain the status quo on both the repo rate and the stance in the December monetary policy.
India’s retail inflation in November rose to 5.5 per cent — its fastest pace in three months — due to higher food prices.
Food inflation, which accounts for nearly half of the overall consumer price basket, was 8.70 per cent in November, up from 6.61 per cent in October.
Food inflation is expected to remain elevated in December as well.
“Moving forward, while food inflation has receded from the highs seen in July, it remains elevated,” RBI Governor Shaktikanta Das said in the minutes.
“In the immediate months of November and December, a resurgence of vegetable price inflation is likely to push up food and headline inflation.
"We have to remain highly alert to any signs of generalisation of price impulses that may derail the ongoing process of disinflation,” Das said.
Deputy Governor M D Patra, who sounded more hawkish than the other members, said inflation remains highly vulnerable to food price spikes, as the spurt in momentum in daily data on key food items for the month of November and early December reveals.
“Consumers, too, reveal more pessimism about inflation a year ahead than when they were surveyed in September. Consequently, monetary policy has to remain on high alert with a restrictive stance,” Patra said.
He said the recent gross domestic product (GDP) data release reinforces the view that the output gap in India has turned positive since the beginning of the year and remains so.
“This points to the likelihood of demand pull shaping the course of inflation outcomes in the period ahead, amplifying future supply shocks,” he said.
Another external member, Rajiv Ranjan, said concerns over elevated food inflation are a major source of uncertainty for the inflation outlook.
External member Shashank Bhide said food inflation is a concern in the short term.
“Given that inflation remains well above the target over the short term, with the projected headline CPI rate of above 5 per cent up to Q1: 2024-25, there is a need to continue the policy support for sustaining the trajectory to the target.”
Two external members, Ashima Goyal and Jayanth Varma, flagged the issue of high real interest rates as inflation approaches the target.
“If inflation sustainably approaches 4 per cent by the middle of 2024, real rates can easily become too high if nothing is done,” Goyal said.
Goyal, who voted for keeping both the rate and stance unchanged, said it was to watch the impact of an expected rise in food inflation over the next couple of months, since repeated supply shocks are a concern.
Varma was more specific on his concern over a high real rate as he said nominal rates should be calibrated to bring down the real rate to 1.5 per cent from 2 per cent.
“At present, projected inflation two to four quarters ahead averages below 4.75 per cnet. The prevailing money market interest rates of 6.75 per cent therefore represent a real interest rate of more than 2 per cent... in my view, a real rate of 2 per cent clearly exceeds the optimal rate.”
Varma, who dissented against the withdrawal of the monetary policy stance in October and earlier, said, if there is a need for a stance, it would be neutral.
“I believe that a stance is not needed at all at this stage.
"If at all there is a stance, it should be neutral,” Varma said.
Das, however, said any shift in policy stance now would be premature and risky.
“Further, with past rate hikes still working through the economy, it would be desirable to closely monitor their full play out,” he added.
