RBI MPC Minutes: India's inflation-growth balance unsettled, food CPI to moderate in Q4; 5 key highlights

The Reserve Bank of India (RBI) released the minutes of the Monetary Policy Committee (MPC) meeting on Friday, December 20, highlighting that India's inflation-growth balance is unsettled for now, and the rate-setting panel's priority is to restore that balance while continuing with its neutral stance a durable alignment of headline inflation with the target is achieved.

The RBI, at its last bi-monthly MPC meeting on December 6, decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent, citing inflationary concerns. However, MPC members Dr. Nagesh Kumar and Prof Ram Singh voted to reduce the repo rate by 25 basis points. The other four members voted to maintain the status quo on the policy rate for the eleventh consecutive time.

Also Read: RBI’s monetary policy panel divided over timing of rate action
 

RBI MPC Minutes: Here are the five key highlights-
 

1.Policy priority to restore inflation-growth balance

Shaktikanta Das, former RBI governor, said restoring the inflation-growth balance should be the policy priority. "The policy priority at this critical juncture must be restoring the inflation growth balance. The fundamental requirement now is to bring down inflation and align it with the target," said Das. It was the last meeting of the MPC under Das, who demitted office earlier this month after completing an extended six-year tenure.

Along with Das, external member Saugata Bhattacharya, Rajiv Ranjan (Executive Director, RBI), and Michael Debabrata Patra (Deputy Governor, RBI) voted for the status quo on the interest rate. According to the MPC minutes, in the outgoing governor's overall assessment, the gains achieved so far in the broad direction of disinflation need to be preserved while closely monitoring the evolving outlook of both inflation and growth.

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2.Headline inflation to moderate in Q4: Das

A sharp accentuation in food inflation pressures led to headline inflation moving above the upper tolerance level of six per cent in October from sub-four per cent in July-August. While primarily emanating from the spike in vegetable prices, the pick-up in edible oil prices due to the levy of import duties and continuing stickiness in cereals also added to the surge in food inflation.

Core inflation, though muted, also registered a sequential uptick during September-October 2024. “Supply-side shocks in food have interrupted the ongoing disinflation towards the target rate; moderation in food inflation can be expected in Q4:2024-25 due to correction in vegetable prices, robust kharif harvest arrivals, a likely good rabi crop and adequate cereal buffer stocks,” said Das.

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According to the former governor, core inflation will likely remain broadly contained as the disinflationary effect of past monetary policy actions continues to play out. On balance, headline inflation is expected to ease to 4.5 per cent in Q4:2023-24 and further to 4.0 per cent by Q2:2025-26.

3.RBI MPC members in favor of rate cut

External members Nagesh Kumar and Ram Singh favoured a 25 basis point reduction in the repo rate. Kumar believes a rate cut would help revive economic growth without worsening inflation, which may soften with seasonal price corrections. Ram Singh said a rate cut would reduce business costs and increase the opportunity cost of holding on to cash for firms and companies.

"Hopefully, this will boost companies' investment plans and improve the scope of employment-linked incentive schemes, helping induce a virtual cycle of wage growth and demand. Tightening the labour market will also improve the efficacy of the monetary policy," he added.

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Both Kumar and Singh highlighted the limited impact monetary policy has on food inflation and the sharp growth slowdown as reasons to shift policy gears. They also support a rate cut to avoid the risk of sharp currency appreciation if India does not normalise interest rates when most other global central banks have already embarked on an easing cycle.

"When the correlation between food prices and core inflation is weak at best and the share of items contributing to inflation has come down, keeping interest rates elevated to keep overall inflation closer to the target imposes growth costs that are disproportionate to the gains on the prices front," said Singh.
 

4.RBI MPC members cautious of policy error

While the RBI kept its key interest rate unchanged earlier in the month, it cut banks' cash reserve ratio for the first time in over four years, easing monetary conditions as economic growth slowed. India's gross domestic product (GDP) growth rate fell unexpectedly to 5.4 per cent in the July-September quarter, its slowest pace in seven quarters, while inflation remains well over four per cent.

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"The monetary policy stance is open to support growth, but it must await the ebbing of inflation on a durable basis or else the uneven progress made so far in disinflation will dissipate," said RBI Deputy Governor Michael Patra. External member Saugata Bhattacharya said both growth and inflation have worsened, and the risk of making a "policy error" was higher now than the October policy.

5.RBI MPC's inflation, GDP forecasts

The RBI MPC lowered the real GDP growth for 2024-25 to 6.6 per cent, from the earlier estimate of 7.2 per cent. The Q3 GDP is projected at 6.8 per cent; and Q4 at 7.2 per cent. Real GDP growth for Q1:2025-26 is projected at 6.9 per cent; and Q2 at 7.3 per cent.

The MPC hiked the consumer price index (CPI)-based inflation for 2024-25 to projected at 4.8 per cent, from the earlier estimate of 4.5 per cent. The Q3 CPI is projected at 5.7 per cent; and Q4 at 4.5 per cent. CPI inflation for Q1:2025-26 is projected at 4.6 per cent; and Q2 at 4.0 per cent.

The MPC consists of three RBI officials and three members appointed by the central government. The next rate-setting panel meeting is scheduled for February 5-7, 2025. Sanjay Malhotra, the newly-appointed RBI Governor, will chair his first MPC meeting in February.