Possible second round impact of food price rise on inflation prompted RBI to keep repo rate unchanged

Mumbai: A possible second-round impact of food price shocks on overall inflation prompted Reserve Bank Governor Shaktikanta Das and other members of the Monetary Policy Committee (MPC) to opt for the status quo on the benchmark interest rate at the bi-monthly policy review earlier in the month.

The RBI at its last bi-monthly monetary policy committee meeting on August 8-10 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns, especially the spiralling prices of tomatoes and vegetables.

All six members voted for the status quo on policy rate, according to the minutes of the meeting released by the Reserve Bank on Thursday.

The latest Consumer Price Index (CPI) data, which was released after the monetary policy review, showed that retail inflation soared to a 15-month high of 7.44 per cent in July.

Also, this was for the first time in the current financial fiscal that the retail inflation breached the RBI’s upper tolerance limit of 6 per cent. The Reserve Bank has been mandated by the government to keep retail inflation at 4 per cent, with a 2 per cent margin on either side. As per the minutes of the MPC meeting, Das stressed that the Reserve Bank’s task of containing inflation was “still not over”.

“Given the likely short-term nature of the vegetable price shocks, monetary policy can 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 anchoring of inflation expectations,” Shaktikanta Das opined.

He said that the inflationary pressures have emerged again with inflation rising to 4.8 per cent in June on the back of rising food prices, adding “headline CPI is expected to harden significantly in July-August, driven by the spike in tomato and other vegetable prices.” Reserve Bank Deputy Governor Patra expressed a similar opinion saying that sustained easing of core inflation was crucial to the MPC’s objective of bringing inflation down to the target.

“This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based,” he argued while voting for maintaining the status quo on the policy rate and for persevering with the withdrawal of monetary policy accommodation.

While unanticipated and short-lived supply-demand mismatches lie outside the realm of monetary policy, Patra said, “the commitment to price stability requires the RBI to see off these price perturbations by guarding against spillovers in India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core

inflation.”