Policy rates have limited impact on food prices: MPC external members

December marked the second policy review meeting for the external members, who have a fixed four-year term

Taming food prices, which have been driving the headline inflation rate, through interest rates has a limited impact, said two external members of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee in the December policy review.

  According to the minutes of the meeting, both these members, Nagesh Kumar and Ram Singh, had voted for a policy repo rate cut of 25 basis points. 

The Monetary Policy Committee decided to keep the rate unchanged at 6.50 per cent with a 4-2 majority in favour of the decision while all members supported the motion to change the stance of the policy to “neutral” from “withdrawal of accommodation”.

 

 

“The extent of the slowdown [in growth] is serious enough to warrant policy attention,” said Kumar, referring to 5.4 per cent growth in gross domestic product in July-September, much below the RBI’s forecast of 7 per cent. 

  Observing that the growth slowdown largely reflected the weakness of the industrial sector, Kumar said this had resulted in employment sentiment deteriorating in Q2. 

MPC External Members

 

                                      Kumar, who had voted for a rate cut in the October policy too, said the inflation spike was largely due to food prices, which have a high weighting in the index.  “Monetary policy, being a demand management tool, has limitations in addressing inflation largely driven by a supply side shock driving up vegetable prices,” Kumar said, while adding food prices should be easing further in the coming months.

  Singh, who voted for a rate cut for the first time, also expects food prices to ease in the fourth quarter. 

  “Interest rates have little bearing on volatility in prices of fruit and vegetables prices,” Singh said. 

  “The elevated interest rates during the last 10 quarters had no significant effect on price volatility.” 

Commenting that the difference between the core inflation rate (<4 per cent) and the policy rate (at 6.5 per cent) has been more than 2.5 percentage points for over a year now, Singh said “this makes for a restrictive monetary regime”. 

“A rate cut will reduce the cost of doing business and increase the opportunity cost of holding on to cash for firms and companies,” Singh added.

 

The third external member, Saugata Bhattacharya, who voted for the status quo on rates, treaded a cautious path amid slowing growth and elevated inflation. 

He, however, expected food prices to remain elevated.

  “Although largely the result of high prices of a few vegetables [October consumer price index inflation of 6.2 per cent], other food components are also becoming more expensive. Preliminary data suggest that food price inflation for November, while moderating, is expected to remain elevated,” Bhattacharya said. He also noted the core inflation rate was creeping up.

  “The prevailing economic conditions bring to mind a phrase a former RBI governor had invoked in a different context: ‘Festina Lente’, Latin for ‘make haste slowly’,” he said.

  December was the second policy review meeting for the external members, who have a four-year term.

  Among internal members, Rajiv Ranjan said in accordance with their assessment, the growth-inflation trend was to reverse in the near future.

  Deputy Governor Michael Patra expressed concern on the uptick in the core inflation rate as he remained guarded on the inflation outlook. 

  “What is worrying is that core inflation has edged up by 70 basis points from its July low. There are early signs of second order effects or spillovers of high primary food prices – following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick,” Patra said. 

He, however, said the expected winter easing in food prices might be the turning point in inflation.

  Shaktikanta Das, who chaired his last Monetary Policy Committee meeting as governor, iterated his optimism on economic growth. 

“The Indian economy remains resilient, notwithstanding the lower GDP data for Q2 of 2024-25,” Das said. 

He also noted the sequential uptick on core inflation during September-October.

 

“In my overall assessment, the gains achieved so far in the broad direction of disinflation need to be preserved, while closely monitoring the evolving outlook of both inflation and growth,” Das said.