Opinion An uncertain inflation outlook increases possibilities of RBI keeping rates high
MPC must be mindful of both domestic and global risks to the growth-inflation trajectories. Its actions must be guided by the objective of ensuring price stability
In its October meeting, the monetary policy committee of the RBI voted unanimously to maintain status quo on rates. The policy repo rate stands at 6.5 per cent. Alongside, the MPC also voted 5-1 to retain its stance of continuing to focus on the “withdrawal of accommodation”. This was expected. Inflation, which had surged to a 15-month high of 7.44 per cent in July, but eased thereafter to 6.83 per cent in August, remains well above the upper threshold of the central bank’s inflation targeting framework.
Moreover, upside risks to inflation remain. High global energy prices and financial markets’ volatility have only complicated matters. RBI Governor Shaktikanta Das, thus, has rightly underlined that monetary policy must be ready “to take appropriate and timely action”.
Much of the uncertainty over the trajectory of inflation can be traced to food prices. Food inflation had surged to 11.51 per cent in July. While it subsequently fell to 9.94 per cent in August, and is expected to soften further, as vegetables prices correct, the outlook is clouded by uncertainty, as the governor has also underlined. Rainfall this season has been subpar, the area under sowing for pulses is lower than last year, reservoir levels have dipped, and then there is the impact of El Nino.
This increases the possibility of price pressures being witnessed in other food items. In August, along with vegetables, inflation was elevated in cereals, pulses and spices. On the other hand, core inflation, which excludes the volatile food and fuel components, has fallen by 140 basis points from its peak in January to 4.9 per cent during July-August. There is a risk that if food inflation remains elevated for long, it can spill over and influence household inflationary expectations. Despite the sharp rise in headline inflation in the second quarter, and the upside risks to food prices, RBI has kept its inflation forecast unchanged at 5.4 per cent for the full year.
While it has raised its forecast for the second quarter, this has been offset by a steeper fall in the third quarter. In comparison, the World Bank has recently raised its forecast for inflation in India from 5.2 per cent for the full year to 5.9 per cent now. This revised forecast is only marginally lower than the upper threshold of the central bank’s inflation targeting framework.
Considering that the RBI has projected inflation at 5.2 per cent in the first quarter of 2024-25, and has retained its growth forecast for the year at 6.5 per cent, which suggests that the economic momentum is holding up, it increases the possibility of a longer pause on rates. So far, the MPC has opted to look through this surge in food prices, and rightly so. However, it must be mindful of both domestic and global risks to the growth-inflation trajectories. Its actions must be guided by the objective of ensuring price stability.
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