MPC members comfortable on inflation; external ones cite slack demand

All members unanimously agreed to change the policy stance to neutral from withdrawal of accommodation

The Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) drew comfort from the likely future trajectory of inflation at its meeting earlier this month, but the three new external members highlighted slackness in demand.   

The members of the re-constituted MPC decided to keep the policy repo rate unchanged at 6.5 per cent with a 5:1 vote. External member Nagesh Kumar voted for a 25-basis point (bp) rate cut.   

All the members were unanimous on changing the policy stance to neutral from withdrawal of accommodation.   

“…the Indian industry is clearly suffering from demand deficits in both domestic and external markets,” said Kumar, according to the minutes of the meeting released on Wednesday.

 

 

“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,” said Kumar, who is director and chief executive at Institute for Studies in Industrial Development, a New Delhi-based policy research and advocacy group. 

 

Economist Saugata Bhattacharya, meanwhile, said that signals on growth momentum presented a mixed picture, with uncertainty regarding aggregate demand. He said inflation ‘appears’ to be more stable.   

“…risks to the near-term growth–inflation trade-off at this point in time seem largely balanced, even as inflation is projected to be trending towards the target and is eventually likely to durably align with it,” Bhattacharya said.  He said updates like ongoing festival season sales and the results of listed private sector corporate houses for the September quarter of FY25 could provide more clarity on evolving demand conditions.   

Commenting that available macroeconomic data and indicators suggested that domestic economic activity remained steady, Ram Singh, director, Delhi School of Economics, said: “Food inflation is expected to moderate later this financial year because of strong kharif and rabi sowing on top of adequate buffer stock.”   

“The headline CPI inflation rate was below 4.0 per cent for the second consecutive month in August 2024. This is very comforting, especially given the core inflation readings remaining in the range of 3.3-3.4 per cent during this period,” he said. He also said RBI’s 7.2 per cent real GDP (gross domestic product) growth projection for FY25 seemed ‘very much achievable’.

At the same time, Singh said: “There is a case for remaining vigilant about food inflation and, at the same time, supporting growth.” 

The RBI has a mandate to maintain inflation within a band of 2-4 per cent.

 

Among internal members, Deputy Governor Michael Patra said that the overall inflation environment was improving and inflation expectations of households and businesses had eased and remain anchored.   

Patra was confident of growth revival, attributing slowdown in economic indicators to idiosyncratic factors like unusually heavy rainfall in the retreat of the southwest monsoon and pitrupaksha, when many consumers defer purchases.   

“They (indicators) should stabilise in the second half of the year as consumption receives a boost in the festival season, the revival of rural demand gathers further strength, and investment is buoyed by budgeted government capital expenditure gaining steam,” Patra said.   

While supporting a change in stance to neutral, Patra was cautious on rate cut. “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.”   

Governor Shaktikanta Das also sounded comfortable on inflation. “Despite its uneven progress, headline inflation is softening,” he said.   

He reiterated that the Indian economy presented a picture of stability and strength and that the balance between inflation and growth was well-poised.   

Citing geopolitical tensions and volatile commodity prices, Das emphasised on remaining vigilant as these were significant risks and their impact could 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,” Das said.   

Internal member Rajiv Ranjan said that with steady progress in monsoon, higher kharif sowing, favourable rabi prospects, and softening global commodity prices, there was more clarity on the disinflationary path.   

“There are enough evidence to give confidence that we are on the right track. Going ahead, there is now greater confidence on inflation aligning with the target unless disrupted significantly by weather events and worsening of geopolitical risks,” he said.

The next policy review meeting is scheduled for 4-6 December. It remains to be seen if more members vote for rate cut given their comfort on inflation trajectory.