NE BUSINESS BUREAU
MUMBAI, FEB 21
Reserve Bank of India (RBI) governor Shaktikanta Das had said at the monetary policy committee (MPC) meeting held earlier this month that the economy needed further monetary stimulus but refrained from pushing for a rate cut given the uncertainty over inflation. This is revealed by the minutes of the meeting, which were released on Thursday. They further show that all members of the MPC were concerned about inflation.
“The Union Budget has sought to provide countercyclical support to the economy while broadly adhering to fiscal prudence. Monetary transmission and bank credit flows have improved, but they need to become stronger. While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain,” Das had said. The MPC meeting resulted in a unanimous vote for holding rates. However, Das announced a three-year loan to banks at cheap rates to bring down their cost of funds.
The minutes show that the MPC members had expected that inflation would come down. This did not happen because the seasonal winter softening of vegetable prices was delayed and prices of several other food items such as pulses, milk and edible oils continued to rise.
“There is uncertainty about inflation excluding food and fuel, given the recent cost-push shocks, especially of mobile charges, prices of automobiles and essential medicines. Overall, the path of headline inflation is expected to moderate. But, given the prevailing uncertainty, it is prudent to await more clarity based on incoming data,” said Das.
Deputy governor Michael Patra said that the MPC has entered “the tunnel of testing trade-offs” and it may be a while before the light at the end of the tunnel is sighted. “The breach in the upper tolerance band of the MPC’s inflation target band in the December print may well recur in the months ahead,” said Patra.
Other members also strongly expressed the need to tackle inflation. “For those who advocate targeting an inflation rate higher than 4%, I am sorry: 4-6% inflation is not price stability!” said economics professor and MPC member Chetan Ghate.
According to Janak Raj, executive director in charge of the MPC, the increase in inflation in nonvegetable food items was more likely to be sustained.
