Earlier this month, MPC unanimously voted to keep repo rate unchanged at 6.5% for the third straight meeting. The members, however, did not signal the need for any rate action at this point unless food inflation gets generalized. Still, the majority of members said their job to bring down inflation is not over yet, despite raising policy rates by 250 basis points since May 2022.

Reserve Bank of India (RBI) governor Shaktikanta Das sounded cautious about the second-round impact of food-price shocks, according to the minutes. “Headline inflation has softened from last year’s elevated level, but it still rules above the target. Our task is still not over,” Das said.

The governor said given the likely short-term nature of the vegetable price shocks, monetary policy could look through the first-round impact of fleeting shocks on headline inflation. “At the same time, we need to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to the anchoring of inflation expectations,” he said.

Speaking at an event in Mumbai on Wednesday, Das said vegetable prices were showing signs of softening, and vegetable inflation was expected to decline in September.

Rajiv Ranjan, executive director of RBI, also sounded cautious on the second-order impact of inflation but noted that MPC’s prognosis of looking through transitory pressures on inflation had proved correct during mid-2020 and mid-2021.

“If monetary policy responds to such a surge in headline inflation, the policy would likely be excessively tight and induce high volatility in macroeconomic conditions,” Ranjan said.

On the other hand, Ranjan said, if these shocks do not go away and become persistent, then inflation expectations can become unanchored, leading to a drift in inflation away from its underlying trend.

Michael Patra, deputy governor of RBI, warned of the impact of liquidity overhang on the inflation outlook. “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 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.”

MPC member J.R. Varma, the lone dissenter to the policy stance, continued to maintain his issue with the disconnect between the stance and rate action, saying MPC should keep a watch on the inflation trajectory for the next several quarters. “I am of the view that the current level of the repo rate is high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.”

Ashima Goyal, another committee member, however, said fear of a second-round effect of food inflation is unfounded. She noted that household inflation expectations and consumer confidence surveys suggest households are looking through this sharp spike in food inflation. Inflation perceptions have risen, but one year ahead, inflation expectations have fallen, she added. “Pre-emptive supply side action would abort second-round increase in wages and other prices that could require further monetary tightening and growth sacrifice.”

The progress of the rest of the monsoon, possible supply side action, further pass-through of past rate hikes, the behaviour of food prices, and the evolution of core inflation have all to be carefully observed, she added.

Updated: 24 Aug 2023, 11:43 PM IST