The Reserve Bank of India (RBI) found support in the form of moderation in inflation to keep monetary policy accommodative to aid economic recovery from the COVID-19 crisis, revealed minutes of the latest MPC meeting released on Monday. The MPC minutes showed that most of the members were least bothered about near-term outlook for CPI inflation, but remained concerned about higher core inflation.
Inflation measured by the Consumer Price Index (CPI) eased to 4.6 per cent in December, thanks to ease in food prices and favourable base effects, after breaching the upper tolerance threshold of 6 per cent for six consecutive months (June-November 2020). However, core inflation, CPI inflation excluding food and fuel, remained elevated at 5.5 per cent in December with marginal moderation from a month ago.
At the MPC meet on February 5, all the six members of the committee voted unanimously to keep the key policy rate unchanged at 4 per cent, with an accommodative stance, so as to ensure that inflation remains well within the target. The panel lowered the retail inflation forecast for the January-March quarter of the current fiscal at 5.2 per cent, while it pegged it to be in 5-5.2 per cent range during the first half of the next fiscal year.
As per MPC minutes, RBI Governor Shaktikanta Das said the sharp correction in food inflation has improved the near-term headline inflation outlook, although core inflation pressures persist. "Given the sharp moderation in inflation along with a stable near-term outlook, monetary policy needs to continue with the accommodative stance to ensure that the recovery gains greater traction and becomes broad-based," he said.
Inflation which remained above the upper tolerance threshold of 6 per cent consecutively since June 2020, registered a larger than anticipated softening to 4.6 per cent in December, from the November reading of 6.9 per cent. Around 90 per cent of this fall in headline inflation in December was on account of sharp movement of vegetables into double-digit deflation as prices crashed from highly elevated levels supported by robust winter arrivals and favourable base effect. This trend is likely to be further buttressed by an expected bumper kharif harvest and the rising prospects of a good rabi crop.
"Further softening in food inflation - both substantial and durable - would, however, be dependent upon the abatement of price pressures that are currently seen in pulses, edible oils, spices, and non-alcoholic beverages," the RBI Governor said.
According to MPC member Ashima Goyal, inflation presented a mixed picture. While prices of many food products softened bringing down headline inflation, profiteering in retail supply had not been able to withstand excess supply, said the eminent economist.
Raising concerns over higher core inflation, which remained near the upper limit, Goyal said the severe winter COVID-19 second spikes in many countries had kept global supply chains disrupted and raised prices of many intermediate goods and commodities.
"As demand revives, local firms are able to pass on the rise in costs. But this is likely to be temporary, although uncertainty remains about the timeline. Rapid vaccination is already moderating spikes abroad making room for the supply response to improve. Oil has a much faster supply response now because of shale oil as well as green substitutes, capping future rise in prices. Gold prices that impact Indian core inflation are falling as vaccination spreads," she added.
Michael Patra, RBI Deputy Governor and member of the MPC, said, "The near-term outlook for inflation appears less risky than the near-term challenges for growth which warrant continuing policy support, at least until the elusive engine of investment fires and consumption, the mainstay of aggregate demand in India, stabilises."