by Swati Bhatt

The Monetary Policy Committee (MPC) will closely monitor factors affecting inflation and take necessary action, though it expects the recent rise in food prices to be short-lived, the minutes of the latest MPC meeting showed.

“While the shock to vegetable prices is expected to recover soon with the arrival of fresh crops, there are risks to the food and overall inflation outlook from El Niño conditions, volatile global food prices and uneven monsoon distribution – all of which are closely watched Needed.” Reserve Bank of India (RBI) Governor Shaktikanta Das wrote in the minutes of the August meeting of the MPC released on Thursday.

Das also pointed to the need for sustained supply-side measures to prevent repeated food supply shocks from escalating into generalized economy-wide price impulses.

The MPC, which has three members from the central bank and three outside members, in a unanimous decision kept the repo rate unchanged at 6.50%.

However, Deputy Governor Michael Patra said risks to the inflation outlook also emanate from excess liquidity in the banking system.

“Draining excess liquidity should figure prominently in the attention of the RBI as it presents a direct threat to the RBI/MPC’s resolve to align India’s inflation with the target, apart from potential risks to financial stability” .

India’s annual retail inflation rose to 7.44% in July, the highest in 15 months, as prices of vegetables and cereals skyrocketed.

The government has taken steps to cushion the price shock by banning exports of non-basmati white rice and imposing a 40% duty on onion exports.

Jayant Verma, an outside member of the MPC, said the current level of policy rates should help rein in price pressure.

“I am of the view that the current level of repo rate is sufficient to bring inflation below the upper tolerance band on a sustained basis and move it towards the middle of the band,” Verma wrote.

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