Minutes of its latest Monetary Policy Committee (MPC) meeting was released by the Reserve Bank of India (RBI) in which Dr Michael Debabrata Patra, the Deputy Governor highlighted that India faces the onslaught of overlapped localised supply shocks, which causes price-sensitive food items in the consumer price index (CPI) for spiking and pushing up headline inflation.
On Thursday, the MPC member said,‘’The elephant in India is the monsoon, with August shortfalls rendering the outlook uncertain in the shadow of El Niño effects even as Indian Ocean dipole conditions are turning positive.”
According to the MPC members, the uneven progress of the monsoon that takes the form of excess rains in the north west regions and disrupting supply, and inadequate rains in the eastern part delays crop sowing,
On August 10, the RBI at its last bi-monthly MPC meeting decided to keep the repo rate unchanged at 6.5 per cent showing concerns of inflation. All the members like M D Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma and Rajiv Ranjan voted in favour of status quo on the policy rate.
The minutes of the meeting highlighted that headline inflation in India is likely to rise in the coming months due to supply disruptions caused by adverse weather conditions. Risks have been swayed so far by the southwest monsoon, a possible El Niño event and pressure from geopolitical hostilities on global food supplies, according to the interest rate panel.
The sharp increase in vegetable prices, led mainly by tomatoes, would continue to influence a sizeable upward pressure on headline inflation over the medium term. However, fresh market arrivals are likely to correct this increase. RBI said that there had been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warranted careful monitoring.
Dr Patra said, ‘’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 the 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 ”
According to the RBI’s Deputy Governor, while unexpected and mismatches of short-lived supply demand lie outside the monetary policy realm, the commitment to price stability requires the RBI to see off these price perturbations by guarding against spillovers. Food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation in India.
He further added that ensuring the sustained easing of core inflation was crucial to the MPC’s objective of bringing inflation down to the target. That objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based.
In July 2023, India’s consumer price index for inflation accelerated to a rate of 7.44 per cent, its highest in 15 months, because of high food and vegetable prices. For the first time in nearly 5 months, July’s inflation data breached the RBI upper tolerance level of 6 per cent.
According to data released by the Ministry of Statistics and Programme Implementation earlier this month, in July the consumer food price index (CFPI) also surged to 11.51 per cent – the highest level since October 2020.