MPC minutes: Elevated inflation to pose challenges for monetary policy, says RBI Governor

Inflation concerns remained primary talking point in the recently concluded Monetary Policy Committee (MPC) meeting with most members expecting it to rise further, posing challenges for monetary policy, reveals the minutes of the meeting released on Friday. The MPC was of the view that inflation may remain elevated, barring temporary relief in the winter months from prices of perishables, which would constrain monetary policy from acting in support of economic growth.

In the MPC meeting, held from December 2-4, 2020, all the six members voted unanimously to keep the policy rate unchanged to continue with the accommodative stance to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

As per the MPC minutes, the decision to maintain status quo was in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The MPC, headed by the RBI Governor Shaktikanta Das, gave mandate to maintain annual inflation at 4 per cent by March 31, 2021, with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.

Also Read: RBI now looks up to govt, winter to control inflation

Out of six members, Deputy Governor Michael Patra, Executive Director Mridul Saggar, independent members Shashanka Bhide and Jayanth R. Varma expected inflation to remain at elevated levels, while the RBI chief and independent member Ashima Goyal were relatively optimistic about it.

"I vote to keep the policy rate unchanged and continue with the accommodative stance as long as necessary - at least during the current financial year and into the next financial year - to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward," Das said.

Also Read: COVID-19 crisis: Retail inflation may stay elevated in short-term, say experts

Referring to recent uptick in economic activities, Das said, "It has become increasingly clear that the recovery underway is faster than what was anticipated at the time of the October policy, although it must also be noted that overall activity is still below its level a year ago."  

"Meanwhile, inflationary pressures have continued unabated, posing challenges for monetary policy," he said.

"On inflation front, a combination of cost-push factors including supply side disruptions, sharp increase in international commodity prices, high retail margins and elevated taxes on petroleum products by both Centre and States have kept inflation above the upper tolerance band of the inflation target. The October 2020 CPI surprised on the upside, both in terms of the extent and depth of price pressures," he added.

Also Read: Retail inflation decreases to 6.93% in Nov from 7.61% in Oct

CPI inflation rose to 7.3 per cent in September and further to six-year high of 7.6 per cent in October, before easing marginally to 6.93 per cent in November. Unseasonal rains, supply disruptions and pandemic-induced woes pushed have kept it well over the RBI's comfort zone. For most part of this year, pricier food items pushed the retail inflation, calculated on the basis of CPI, higher in the range of 6.58-7.61 per cent, except for March when the reading was 5.91 per cent.

Experts believe retail inflation is likely to average around 6.3 per cent this fiscal and mostly will remain sticky going forward owing to pick-up in demand across sectors, diming hope for rate cut in the current fiscal.