Inflation dominated RBI’s Feb MPC meet, show minutes

MPC member Jayanth Varma pitched for 25 bps cut in repo rate.

New Delhi: The risk of rise in inflation amid food price uncertainty dominated the Reserve Bank of India’s monetary policy committee discourse early this month, as per minutes of the meeting released on Thursday.

“Food price uncertainty remains a major source of volatility for headline inflation outlook. Growing geo-political tensions and supply chain disruptions due to new flash points also pose further risks to the inflation outlook,” RBI Governor Shaktikanta Das in the meeting.

Das underlined that the RBI’s job to bring down inflation is not over, and any premature move on the policy front could undermine the success achieved so far.

“Price and financial stability are essential to sustain a long haul of high growth. Policy imperative at the current juncture is to remain focused on achieving the 4 per cent inflation target on a durable basis, keeping in mind the objective of growth,” the governor added.

Speaking at the meeting, RBI Deputy Governor Michael Debabrata Patra noted that “the outlook for the Indian economy remains highly sensitive to inflation risks”.

“High inflation erodes purchasing power, especially for those least protected against the higher costs of essentials like food. Restoring price stability is beneficial for all,” Patra said.

The RBI’s monetary policy committee meeting was held in Mumbai during February 6-8. In the meeting, the committee decided to keep key policy interest rates unchanged for the sixth time in a row and affirmed commitment to bring down retail inflation to 4 per cent in a sustainable manner.

Five out of the six MPC members voted to keep the policy repo rate unchanged at 6.50 per cent, while Jayanth Varma voted to reduce the policy repo rate by 25 basis points.

Varma claimed that there is space for monetary easing without risking an inflation spiral.

“Inflation is projected to average 4.5 per cent in 2024-25, and, therefore, the current policy rate of 6.5 per cent translates into a real rate of 2 per cent. I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4 per cent,” Varma said.

“It is true that economic growth is holding up well, but there is no evidence at all that the economy is overheating,” he added.

Varma further underlined that a real interest rate of 1-1.5 per cent would be sufficient to glide inflation to the target of 4 per cent. “A real interest rate of 2 per cent creates the very real risk of turning growth pessimism into a self fulfilling prophecy,” he said.

Making a case for monetary policy easing, Varma said, “It must also be borne in mind that the process of fiscal consolidation is projected to continue in 2024-25. This opens up space for monetary easing without risking an inflationary spiral.”