Concerns about food price increases continue to worry MPC members

The minutes of the April MPC meeting reflect the RBI’s confidence on favorable domestic dynamics, while concerns remained over the possibility of spikes in food prices. Even though domestic conditions are comfortable, global dynamics are expected to play an important role in the RBI’s response function. Analysts say the central bank will not lead the Fed in a policy reversal in CY24, but policy management will need to remain vigilant. Concerns about the possibility of future food price shocks from bad weather and the need to sustainably anchor inflation expectations and the healthy domestic growth trajectory led a majority of MPC members to continue to support a pause in interest rate action, as well as status quo about the position . Most MPC members, including RBI Governor Shaktikanta Das, emphasized on firmly anchoring inflation expectations and maintaining financial stability.

Dr. Ranjan said market expectations of early rate cuts in the DM have undergone significant and rapid repricing due to incoming data, adding to uncertainty and volatility in the market. Dr. Goyal specifically ruled out giving forward-looking guidance on interest rates, citing the example of the US. Moreover, even if food or commodity price shocks were to occur, this could reduce the pass-through of such shocks. Furthermore, both Dr. Patra as Das that while inflation expectations are becoming entrenched, achieving them on a sustainable basis was crucial to achieving the inflation target. Dr. Patra also said risks to financial stability in India need to be continuously monitored and pre-emptively addressed despite improving growth trends. Thus, RBI does not want to introduce unnecessary volatility in the market, especially during a phase of global geopolitical uncertainty, and hence interest rates are likely to remain untouched for some time going forward. There were a few comments on real interest rates, but with different inferences.

Prof. Varma’s dissent was largely based on the fact that the current real policy rate of two percent is excessive, and that a real interest rate of 1 to 1.5 percent should be sufficient to bring inflation back to target without this being at the expense of growth. Dr. Goyal stated that real interest rates are currently higher than neutral interest rates, but this is not an issue at the moment as growth remains strong and investment is rising along with robust credit growth. She also believed that maintaining stability is a priority at this time as a justification for keeping interest rates stable. With only Prof. Varma talking about slower growth forecasts for FY25 versus FY24, it is clear that MPC’s focus currently is on inflation and not growth, in terms of domestic factors. However, Emkay Global maintains that global dynamics will continue to play an important role in the RBI’s response function, especially in a comfortable domestic macro environment. So the RBI may not lead the Fed in a policy turnaround in CY24, but the rise in food prices will continue to have an impact on interest rate hikes.