MPC Minutes: Likely Impact Of Food Price Shock On Inflation Prompted RBI To Keep Rates Unchanged

The RBI at its last bi-monthly monetary policy committee meeting on August 10 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns

RBI Governor Shaktikanta Das on Wednesday said the frequent food price spikes pose a risk to anchoring of inflation expectations and called for timely supply side measures to limit such shocks.

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The possibility of a second round impact of food price shocks on the overall inflation prompted Reserve Bank Governor Shaktikanta Das to opt for the status quo on benchmark interest rate at the bi-monthly monetary policy review earlier in the month. The central bank at its last bi-monthly monetary policy committee (MPC) meeting on August 10 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns.

All six members including M D Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma, and Rajiv Ranjan voted for status quo on the policy rate. "Our task (of containing inflation) is 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," opined Das, as per the minutes of the meeting released by the RBI on Thursday.

According to RBI Deputy Governor Patra, ensuring the 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. 

RBI Governor Shaktikanta Das on Wednesday said the frequent food price spikes pose a risk to anchoring of inflation expectations and called for timely supply side measures to limit such shocks. Delivering the Lalit Doshi Memorial Lecture here, Das said vegetable price shocks are short term in nature and the monetary policy can wait for the "dissipation" of the first-round effects of the current spate of shocks.

However, the RBI will be on guard to ensure that second order effects in the form of generalisation and persistence are not allowed to take hold, he said. "The frequent incidence of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022," Das said and stressed that the RBI will be watchful on this front. The role of continued and timely supply side interventions assumes criticality in limiting the severity and duration of such shocks," Das added.