Food Inflation Slows Disinflation: Insights from RBI Governor Das
23.06.2024: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) recently discussed the impact of food inflation on the disinflation process. During the meeting held from June 5 to 7, RBI Governor Shaktikanta Das highlighted that the slow pace of disinflation is primarily due to elevated food inflation, driven by recurring supply-side shocks.
Key Takeaways from the MPC Meeting
- Repo Rate Unchanged: Four out of the six MPC members voted to keep the policy repo rate steady at 6.5% and maintain the stance of withdrawing accommodation.
- Inflation Concerns: Das pointed out that headline consumer price-based inflation is moderating very slowly. From February to May 2024, inflation eased from 5.1% to 4.7%, while food inflation remained high at 7.9%.
Diverging Opinions Within the MPC
- Ashima Goyal and Jayanth Varma: These external MPC members voted for a 25 basis points cut in the repo rate, arguing that high interest rates could harm economic growth. They also recommended changing the policy stance to neutral.
- Governor Das’s Perspective: Das stressed the importance of maintaining a disinflationary policy stance due to persistent high food inflation. He warned that hasty actions could be detrimental.
Projections and Future Outlook
- Inflation Projections: The baseline projections indicate inflation moderating to an average of 4.5% in 2024-25. However, factors like an exceptionally warm summer, potential rabi production shortfalls, and rising milk prices require close monitoring.
- Economic Growth: The RBI is optimistic about domestic growth, projecting a real GDP growth rate of 7.2% for the current financial year.
Insights from Other MPC Members
- Michael Patra: The Deputy Governor noted the slow pace of inflation easing and the Indian economy’s vulnerability to food price shocks.
- Rajiv Ranjan: He highlighted that while headline and core inflation have moderated, repeated food price shocks are delaying alignment with the inflation target.
- Shashanka Bhide: Emphasized the need for a durable moderate inflation rate to sustain growth.
Calls for Policy Adjustments
- Ashima Goyal’s View: Goyal argued that supply shocks no longer have persistent effects on inflation, suggesting it’s time to move on from the current high-interest rate policy.
- Jayanth Varma’s Warning: Varma cautioned that maintaining restrictive policies for too long could sacrifice growth, noting that professional forecasters predict lower growth rates in the coming years.
The RBI’s MPC meeting underscored the challenges posed by high food inflation to the disinflation process. While some members advocate for rate cuts to support growth, the majority believe in maintaining the current policy stance to ensure long-term price stability and sustainable economic growth.