‘Elevated inflation likely to stay’ — concern that dominated RBI’s latest monetary policy meet

Inflation has been consistently over 6% over the last few months on account of rising food prices and supply constraints. It touched a 77-month high of 7.6% in Oct.

A man standing in a supermarket | Representational image | Manisha Mondal | ThePrint

New Delhi: Inflation concerns dominated the meeting of the Monetary Policy Committee (MPC) held in the first week of December with most members expecting further upward pressure.

The six-member MPC is headed by Reserve Bank of India (RBI) Governor Shaktikanta Das. Its members include two of his colleagues, Deputy Governor Michael Patra and Executive Director Mridul Saggar, and three independent members — Shashanka Bhide, senior advisor, National Council of Applied Economic Research; Ashima Goyal, professor, Indira Gandhi Institute of Development Research and Jayanth R. Varma, professor, Indian Institute of Management, Ahmedabad.

According to the minutes of the monetary policy committee meeting released Friday, while Patra, Saggar, Bhide and Verma feared that upward pressure on inflation could continue, Das and Goyal were relatively more optimistic.

The meeting was held from 2-4 December.

At the meeting, Patra said he expected inflation to remain at elevated levels.

“Elevated inflation has checked in and may be here to stay,” he said. “With retailers striving to recover lost incomes, it is unlikely that margins will ease in the near-term. Meanwhile, households recouping lost incomes may work towards keeping the supply price of services elevated.”

He pointed out that a returning cyclical demand, backed by improving business and consumer expectations, may allow a higher pass-through of input prices into selling prices as businesses endeavour to preserve profit margins, further adding to inflation.

“This is also reflected in expectations of surveyed manufacturing firms and persisting pessimism among consumers on the price situation,” he said.

Saggar said though monetary policy so far has provided a “bungee cord to growth, its tensile strength depends on how inflation evolves ahead”.

He pointed out that though inflation remains predominantly supply driven, cost push inflation could get a further fillip on account of an increased rural wage inflation.

Cost push inflation refers to a situation when prices of commodities and services go up due to increase in wages and higher prices of inputs.

‘Disruption in production seen in rising prices’

Bhide pointed out that a reflection of the disruptions in the production processes is also seen in the rising price pressures. “While the rising rate of food inflation is mainly a result of production setbacks, there is also some evidence of price pressures in other sectors,” he said.

“The firming up of commodity prices in the international markets affects domestic prices through either input costs or prices of competing domestic output,” he added. “The large levels of indirect taxes on petroleum fuels has kept the transport costs high for all sectors.”

He further said that though these pressures appear to be largely supply related, they may be supported by improving demand conditions and are a concern.

Verma pointed out that the dropping of short-term interest rates, to below the existing policy rates, could prove expensive by creating inflationary pressures and inflationary expectations.

The MPC had maintained a status quo in rates citing rising inflation in its December review. Inflation has been consistently over 6 per cent over the last few months on account of rising food prices as well as supply constraints in other items. It touched a 77-month high of 7.6 per cent in October before falling marginally to 6.93 per cent in November. 

The MPC had forecast that inflation for the third quarter will be at 6.8 per cent and at 5.8 per cent in the fourth quarter.

‘Inflation may ease’

Goyal, however, was optimistic that inflation will ease and pointed out that inflation expectations of households have softened.

“There is still a chance CPI (Consumer Price Index) inflation may fall steeply in the next few months on supply-side action supported by favourable base effects. If inflation softens, such negative real rates will not persist,” she said. “The inflation expectations survey of households shows a sharp 100 basis points fall in current household inflation perceptions between September and November. There is also a mild softening of three month and one-year ahead inflation expectations… Professional forecasters all expect inflation to soften in H2 of this fiscal year.”

She also pointed out that an overvaluation of the rupee can hurt exports, raise the country’s risk and lead to a sharp depreciation later.

Das noted that a combination of cost-push factors including supply side disruptions,sharp increase in international commodity prices, high retail margins and elevated taxes on petroleum products by both Centre and states have kept inflation above the upper tolerance band of the inflation target.

He was, however, optimistic that going forward, stronger measures to address the supply side issues and the winter moderation in vegetable prices should result in some softening in inflation from its current levels.

He added that the inflation survey of households indicates a modest softening in both three-month and one-year ahead inflation expectations, though median inflation expectations continue to remain at elevated levels.