Growth-inflation dynamics to guide MPC’s Feb move

RBI MPC MEMBERS BELIEVED INFLATIONARY PRESSURES CAUSED LARGELY BY A SPIKE IN VEGETABLE PRICES ARE EXPECTED TO REVERSE BY Q4 OF THIS FISCAL

MUMBAI: The Reserve Bank of India (RBI) expects uncertainties in inflation outlook over the next few months, while food inflation eases and remains transitory, according to the December monetary policy, which was released on Thursday.

All the members of RBI’s monetary policy committee (MPC) agreed that inflationary pressures caused largely by a spike in vegetable prices are expected to reverse by the fourth quarter of this fiscal year. However, it is still not known whether the spike in pulses and milk prices could spill over to non-food items.

In its December policy, the MPC had revised the inflation projection for the second half of the current fiscal year to 5.1-4.7% and 4-3.8% for first half of 2020-21. However, the recent reading showed that retail inflation surged to 5.54% in November with food price inflation, measured by the Consumer Food Price Index, rising to 10% from 7.89% in October. Retail inflation could touch 6% in December.

The recent increase in telecom charges, along with non-vegetable food items, could impact the inflation trajectory, according to RBI governor Shaktikanta Das.

“The surge in food inflation in the last three months, driven up by a spike in onion and other vegetable prices, could be transitory. It is likely to reverse gradually as the late kharif output comes to the market. In view of this, even as the current food price spike driven by vegetables can be looked through, there is a need for greater clarity as to how the overall food inflation path is going to evolve, as there is some uncertainty about the outlook of prices of certain non-vegetable food items such as cereals, pulses, milk and sugar,” said Das.

Michael Debabrata Patra, executive director in-charge of monetary policy, added: “Inflation pressures are rotating from vegetable prices to those of other elements of food and beverages. By current reckoning, vegetables prices can be expected to reverse by Q4FY20 as the supply situation improves. They can, therefore, be looked through while setting monetary policy. The key question is will the upside in other food prices reverse or persist, especially those of pulses and milk? If it persists, will it spill over into nonfood inflation?”

Ravindra Dholakia, the most dovish member of the committee, surprised the market with his decision to vote for a pause on policy rates. He noted that while there was space for more rate cuts, it was prudent to wait for more clarity on growth-inflation dynamics before taking a decision.

Chetan Ghate, the other external member, also noted that the sharp spike in inflation expectations, with the three-month ahead expectations rising from 8% to 9.2%, and one-year from 8.1% to 9.9%, is a concern. However, Ghate maintained that despite that, future monetary policy action will be dependent on growth-inflation dynamics.