India cannot risk another bout of inflation: RBI governor
India cannot risk another surge in inflation, and the best approach would be to wait for clearer evidence of inflation aligning durably with the target, Reserve Bank of India governor Shaktikanta Das said in the minutes of the monetary policy meeting released on Wednesday. He said that uncertainties such as heightened geopolitical tensions, volatile commodity prices, and the risk of adverse weather affecting food inflation present significant risks, and their impact should not be underestimated.
“At this stage of the economic cycle, having come so far, we cannot risk another bout of inflation. The best approach now would be to remain flexible and wait for more evidence of inflation aligning durably with the target,” said Das, as per the minutes of the Monetary Policy Committee (MPC) meeting held earlier in the month. “Monetary policy can support sustainable growth only by maintaining price stability,” he said.
The MPC, which consists of three Reserve Bank of India (RBI) and three external members, had kept the repo rate unchanged at 6.50% for a tenth straight policy meeting, with a majority vote of 5-1.
However, it changed the stance to ‘neutral’ from the earlier ‘withdrawal of accommodation’ unanimously.
This was the first meeting of the reconstituted MPC. The three newly-appointed external members are Ram Singh, Saugata Bhattacharya and Nagesh Kumar.
“Despite the near-term uptick in inflation, the outlook for headline inflation towards the later part of the year and early next year points to further alignment with the 4 % target,” Das said.
Retail inflation rose to a nine-month high of 5.5 % in September after remaining below 4% for the previous two months owing to higher food inflation.
RBI deputy governor Michael Debabrata Patra said a gradual wait-and-assess approach to removing policy restraint in terms of the policy rate remains appropriate as long as inflation is not lastingly close to its target.
“Reducing restraint too quickly may negate the progress made on disinflation. Hence, a gradual wait-and-assess approach to removing policy restraint in terms of the policy rate remains appropriate as long as inflation is not lastingly close to its target,” said Patra.
External member Nagesh Kumar, who voted for a 25 basis point rate cut, had said it was an opportune moment for RBI to start the process of normalizing the monetary policy.
“Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic as well as export markets is flagging, a rate cut could help to revive demand and help boost private investment,” Kumar said.
Demand deficits in both domestic and external markets could be the reason private investment has not picked up momentum despite companies’ healthy balance sheets and government reforms, he added.
External member Saugata Bhattacharya said that the battle against rising prices is still not over. “The arduous battle against inflation is far from won, but we are more confident of eventual success in bringing CPI inflation durably closer to the target,” said Bhattacharya.
Structural system liquidity has shifted over time from deficit to surplus, helping to anchor overnight and short-term rates close to the repo rate, he added.
“Food inflation is an important source of uncertainty, which has increased in August from the preceding month. Moreover, there is a significant divergence within the food sub-groups,” Ram Singh said.
Going forward, he said, the moderation in headline inflation can be unsteady in the near term due to adverse base effects. Food inflation is expected to moderate later this financial year because of strong kharif and rabi sowing on top of adequate buffer stocks.
Rajiv Ranjan, executive director at the RBI, stated that there will be greater clarity on several uncertainties between now and December, including the US elections, geopolitical risks, and Chinese fiscal stimulus, as well as their impact on global commodity prices. “At this juncture, India’s resilient growth story helps us to continue our determined focus on inflation and keep the policy rate unchanged at 6.5%,” Ranjan said.