4% inflation target top priority, show minutes of October MPC meeting

Recurring incidences of large and overlapping supply side shocks bring with them the risks of generalisation of inflation impulses, possible loss of monetary policy credibility and de-anchoring of inflation expectations, he said.

Retail inflation eased to a three-month low of 5.02% in September on the back of softer vegetable prices. In the October policy, the MPC unanimously decided to leave the repo rate unchanged at 6.5 per cent for the fourth consecutive time. With a majority of 5:1, it also retained the monetary policy stance of withdrawal of accommodation.

MPC member Ashima Goyal, who voted for ‘withdrawal of accommodation’, said that the stance rules out a rate cut but permits an increase only when there are second round effects from the recurring supply shocks, the minutes of the meetings held on October 4-6 showed.

“I vote for a pause in the repo rate, and also vote for the stance on withdrawal of accommodation in order to signal the MPC’s determination to reach its 4 per cent target. This stance rules out a rate cut. It allows a rise but that will not be required unless there are second round effects from the repeated supply shocks. So far there are no signs of such pass through,” Goyal said.

The guidance, therefore, is that future moves will be data dependent, she said. However, one of the external members of the MPC, Jayanth Varma, while supporting the decision to keep the repo rate unchanged, expressed reservation on the stance on withdrawal of accommodation. He has done so previously as well.

“Successive meetings that promise to withdraw accommodation while actually keeping rates unchanged do not enhance the credibility of the MPC. I would much prefer a stance in which words are consistent with the actions,” Varma said at the meeting.

At this point of time, the guidance that the market really needs is not about how high the terminal repo rate would be, but about how long the rate would be maintained at a high level, he said.

Varma said it would be useful for the MPC to communicate its intention to keep real interest rates high enough for as long as is necessary to drive projected inflation close to the 4 per cent target on a sustainable basis.

Shashanka Bhide, MPC’s external member, voted to remain “focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth”.

The RBI governor said going ahead, inflation outlook continues to be beset with uncertainties, especially from adverse weather events, the playout of El Niño conditions, uncertainties in global food and energy prices and volatility in global financial markets.

During FY2024, the RBI expects CPI inflation to be at 5.4 per cent, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent.

Das said inflation expectations of households — both three months and a year ahead — have, however, moved together to single digit for the first time since the COVID-19 pandemic.

“In this situation monetary policy must remain actively disinflationary to ensure that the ongoing disinflation process progresses smoothly,” he said.

RBI’s Deputy Governor Michael Patra said inflation prints for September and October will need to be monitored carefully to look out for the moderation that our projections anticipate.

“If we tame inflation durably, we will prepare the ground for a long innings of strong and stable growth,” said Patra.

“Our projections anticipate that growth will gather positive momentum from the second quarter onwards. Monetary policy can contribute by remaining sufficiently disinflationary without being overly restraining,” he said.

Rajiv Ranjan, who voted for a pause in the repo rate, said though transitory relative price changes in the economy that may spur temporary bouts of inflation may be looked through, monetary policy also needs to be watchful to see that large and frequent supply side shocks does not trigger generalised increase in prices.