In the minutes of the Monetary Policy Committee (MPC) meeting conducted on June 6 to 8, RBI Governor Shaktikanta Das warned that although the inflation trajectory has significantly softened in March–April 2023, unfavourable weather occurrences have the ability to reverse the trajectory.
From 5.7 percent in March to 4.7 percent in April, the retail inflation rate, or CPI, dropped to its lowest level in 18 months. In May, it dropped even more, to 4.25%.
The RBI Governor claims that there are still significant uncertainties regarding the inflation outlook for the second half of the current fiscal year compared to April.
“The spatial and temporal distribution of the south-west monsoon in the backdrop of a likely El Nino weather pattern needs to be watched carefully, especially for its impact on food prices. International prices for key food items like rice and sugar are at elevated levels,” Das penned down in the MPC minutes published on Thursday.
“Adverse climate events have the potential to quickly change the direction of the inflation trajectory,” Das averred.
The six-member MPC maintained the repo rate at 6.5 percent in the June 8 policy for a second time in a row. The panel kept the aim for real GDP growth at 6.5 percent while slightly lowering the CPI projection from a prior projection of 5.2 percent to 5.1 percent.
“The disinflation towards the target rate of 4 per cent (for CPI) is likely to be gradual and protracted,” Das added.
“Our fight against inflation is not yet over. We need to undertake a forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if the situation warrants,” he added.
For the second time in a row, the six-member MPC kept the repo rate at 6.5 percent in its June 8 meeting. While keeping the real GDP growth target at 6.5 percent, the panel slightly reduced the CPI projection from an earlier estimate of 5.2 percent to 5.1 percent. “Hence, monetary policy needs to remain in ‘brace’ mode, ensuring that the effects of these shocks dissipate without leaving scars on the economy,” Patra wrote in the minutes.
“Holding the rate unchanged should not be interpreted as the interest rate cycle having peaked, but as a period of careful evaluation of a decision on the extent of additional policy tightening, if needed,” Patra added.
Jayanth R. Varma, one of the external MPC members, expressed reluctance about the withdrawal of accommodation while voting to maintain the repo rate. “…I find that with every successive meeting, this stance is becoming more and more disconnected from reality,” he mentioned in the minutes.
“The main reason for not dissenting is that, after two successive meetings at which the repo rate has been left unchanged, this stance now appears more vestigial than a serious statement of intent,” Varma added.
Ashima Goyal, a different external member of the MPC, stated that while inflation is down as anticipated, it is crucial that the real repo rate not increase too much. “Such action, together with the greater impact of official communication in emerging markets, is adequate to bring inflation to target as the effect of shocks dies down. It does not require the nominal repo to be kept higher for longer,” Goyal mentioned in the minutes.