The Monetary Policy Committee’s (MPC) steadfast approach to align inflation durably to the 4% target guided its decision to hold on to the policy rates, the minutes of the MPC meeting released by the Reserve Bank of India (RBI) on Thursday showed. 

“The wedge between headline and food inflation has been widening, and stalling the alignment of the former with the target,” MPC member & Deputy Governor Michael Debabrata Patra said.  

“Taking into account double digit inflation in salient food categories such as cereals, pulses, spices and vegetables for several months, empirical evidence points to a rise in the time varying persistence of food inflation, i.e., it is taking longer to revert to its trend after a shock,” he pointed out. 

Stating that there was also evidence of the time varying trend of food inflation increasing, negating the gains made through core disinflation, he said higher trend food inflation was spilling over into inflation expectations of households and consumer confidence. 

“In the case of the former, even their current perceptions have now started rising along with outer-term expectations. The recent assessment of the neutral rate of interest suggests that the disinflationary stance of monetary policy is appropriate, especially given the persisting positive gap between actual inflation outcomes and the target,” he mentioned. 

Emphasising that monetary policy is an instrument for modulating aggregate demand, he said food-price shocks may originate outside the realm of monetary policy and initially manifest themselves in supply mismatches, but when their effects stay in the inflation-formation process, they can propagate through second-order effects and get generalised to which monetary policy cannot be insensitive.

“Persistently rising prices are always and everywhere a reflection of too much demand chasing too less supply even if it is a supply shortfall that starts the price spiral,” he observed. 

Emphasising that MPC was committed to align inflation durably to the target, he said, “That is not yet achieved; any faltering from this commitment could undermine the prospects of the Indian economy.” 

Governor Shaktikanta Das, also Member of the MPC, observed inflation was gradually trending down, but the pace was slow and uneven. “Durable alignment of inflation to the target of 4% is still some distance away. Persistent food inflation is imparting stickiness to headline inflation. Inflation expectations need to be kept anchored,” he stressed.

“At this stage, when durable disinflation to the target is still a work in progress, the issue of equilibrium natural interest rate is premature. Policy-making in the real world cannot be based on an abstract, theoretical and model-specific construct that is unobservable and time-varying. Hence, any justification for policy easing based on so-called high real rates can be misleading,” he emphasised. 

He stated that the calibrated increase in policy repo rate by 250 basis points since May 2022 and the subsequent change of stance to the withdrawal of accommodation had facilitated gradual disinflation over 2022-23. 

The 50th meeting of the MPC was held from August 6 to 8 and the rate fixing panel by a 4:2 vote decided to keep the policy repo rate unchanged at 6.50%. Ashima Goyal and Jayanth R. Varma voted against the resolutions.