RBI Minutes: Inflation Risks Re-Emerging, Says 'Warrants Close Monitoring'; More Rate Hikes Ahead?

The minutes of the meeting of RBI's latest monetary policy have been hawkish with signals of more rate hikes on card in the forthcoming policies. While RBI does expect vegetable prices to calm down going forward, however, inflation and food prices are at risk due to a host of global and domestic factors. Hence, RBI governor Shaktikanta Das says this 'warrants close monitoring'. The governor has hinted that RBI has kept the repo rate unchanged at 6.50% in August policy, with preparedness to act, "should the situation so warrant."

In the minutes of MPC's meeting, RBI governor Shaktikanta Das said, "While the vegetable price shocks are expected to correct quickly with the arrival of fresh crops, there are risks to the food and the overall inflation outlook from El Nino conditions, volatile global food prices and skewed monsoon distribution - all of which warrant close monitoring."

He highlighted that the headline had eased significantly from 6.2% in Q4 of FY23 to 4.3% in May 2023, reflecting the combined impact of monetary tightening and supply augmenting measures.

However, inflationary pressures are emerging again with inflation rising to 4.8% in June on the back of rising food prices, Das added.

RBI has expected headline CPI to harden significantly in July and August. The data on CPI inflation for July 2023 was released earlier this month, and it has skyrocketed to 7.44%, the highest level since April 2022. This huge upside is due to a sharp spike in food prices. Food inflation zoomed to 11.51%. Inflation has also breached RBI's upper tolerance limit for the first time since March 2023.

According to Das, headline inflation has softened from last year's elevated level but it still rules above the target. He added, "Our task 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," Das added.

Das also pointed out that the impact of a cumulative rate hike of 250 basis points that took place between May last year to February 2023, on the economy "is still playing out."

Considering all these aspects, Das said that he voted to keep the policy repo rate unchanged at 6.50% with the preparedness to act, should the situation warrant. He also voted to continue with the stance of withdrawal of accommodation as the transmission of the rate hikes on lending and deposit rates is still incomplete.

In the case of liquidity, Das said, "The Reserve Bank's liquidity management has been nimble and two-sided as per requirement. We will manage the liquidity overhang proactively using the various instruments at our command while ensuring that the banking system has adequate liquidity to meet the productive requirements of the economy."

Lastly, he concluded, " In this dynamic environment, we remain steadfastly committed to our goal of aligning inflation to the target of 4.0 per cent. We continuously assess the impact of our past actions, the implications of incoming data for the evolving inflation and growth dynamics and stand in readiness to act whenever necessary."

All six members of the monetary policy committee voted to keep the repo rate unchanged at 6.50% in the August 2023 policy. This would be the third consecutive policy where the status quo is maintained at key rates.

The next meeting of the MPC is scheduled for October 4-6, 2023.