Headline Inflation Faces Upside Pressures In Near Term On Costlier Vegetables: RBI

The spike in vegetable prices, led by tomatoes, will exert sizeable upside pressures on the near-term headline inflation trajectory, according to the minutes of the MPC meeting released by the RBI on Thursday. It said the possibility of a second round impact of food price shocks on the overall inflation prompted RBI MPC to opt for the status quo on the policy rate earlier this month.

The Reserve Bank of India (RBI) at its last bi-monthly monetary policy committee (MPC) meeting on August 10 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns.

All six members, including M D Patra, Shashanka Bhide, Ashima Goyal, Jayanth R Varma and Rajiv Ranjan, voted for status quo on the policy rate.

“Our task (of containing inflation) is still not over. Given the likely short-term nature of the vegetable price shocks, monetary policy can look through the first-round impact of fleeting shocks on headline inflation. At the same time, we need to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to anchoring of inflation expectations,” opined Das, as per the minutes of the meeting released by the RBI on Thursday.

According to the RBI MPC minutes, going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory.

“This jump is, however, likely to correct with fresh market arrivals. There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring,” according to the minutes.

According to RBI Deputy Governor Patra, ensuring the sustained easing of core inflation was crucial to the MPC’s objective of bringing inflation down to the target.

“This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based,” he argued while voting for maintaining the status quo on the policy rate and for persevering with the withdrawal of monetary policy accommodation.