Strong Growth Momentum provides the headroom to watch for durable decline in inflation | Uncertainties abound favor a cautious approach to policy making.

The MPC Minutes show an unwavering commitment to a durable decline in inflation esp. in the backdrop of strong economic growth momentum. The macro economic outlook is subject to considerable uncertainties on weather related factors, geopolitical tensions, monsoon progress and commodity price rise among others. Steady disinflation in Core prices and deflation in energy prices has negated the food price rise on the headline inflation but going forward how much space does monetary policy get when core prices start rising as is indicated in the more frequent PMI readings is to be watched out for.

What this means for Monetary Policy ? Status quo to be maintained going forward.

The MPC will witness changes in its external members, with Ashima Goyal, Jayanth Varma and Shashikant Bhide completing their non extendable term in Oct 2024. Though Dr.  Ashima Goyal has spoken at length about the elevated real rates in her remarks, as the term draws to a close, both Dr. Goyal and Dr. Bhide's policy narrative will broadly be in line with the consensus thinking at the RBI until the end of the term. 

Dr. Shashikant Bhide - Given the strong momentum of growth at this juncture, it is necessary to maintain monetary policy focus on aligning the inflation trends with the target.

Dr. Ashima Goyal - Maintaining stability must have a priority. 

Her remarks mostly focused on High Real Rate through the lens of both Core Inflation and Headline Inflation. Core Inflation in March 2024 declined further to 3.25% and Headline Inflation printed at 4.85%. On a forward looking basis, headline inflation for FY 2025 is seen at 4.50% which implies real rates of 200 bps, assuming a repo rate of 6.50%. She suggested forecasts of Core inflation should also be published. 

On the subject of higher potential growth, she makes an interesting point, that inflation approaching the target suggests absence of over-heating. She mentions since core inflation has moved steadfastly lower, growth is below potential and Neutral Interest Rates (NIR) have not risen. 

She also remarked that assuming Neutral Interest Rates have risen and are at 1.50%, policy is in a restrictive area which could start affecting growth as policy works with lagged effects. 

There is no acknowledgement of US Interest Rates bearing any consideration to policy decision making.

Maintaining stability must have a priority. With the term of the external members drawing to a close in Oct 2024, why rock the boat. 

Prof Jayant Varma stuck to his stance. His remarks state that there is a growth sacrifice of 50 bps in FY 2025 which is the sacrifice for keeping real policy rates high. 

Dr. Rajiv Ranjan - We need to utilize the space provided by strong growth to focus on inflation. His remarks focused on the need to wait for further clarity on monsoon, rabi production and kharif sowing, geopolitical landscape, rise in input prices 

Dr. Miacheal D Patra - Food inflation risks remain elevated. Global food prices are rising in an environment of rising input costs and supply chain pressures. The headroom provided by declining trends in core inflation and fuel deflation in energy prices does not assure a faster alignment of the headline with the target. Downward pressure on inflation must be maintained until a better balance of risks becomes evident and the layers of uncertainty clouding the near-term clear away.

Governor - Success in the disinflation process should not distract from vulnerability of inflation trajectory to frequent incidences of supply side shocks - food, commodities.  Extant monetary policy setting is well positioned. Market expectations are also closely aligned with that of the MPC. Monetary policy transmission is continuing and inflation expectations of households are also getting further anchored. At this stage, we should stay the course and remain vigilant. The gains in disinflation achieved over last two years have to be preserved and taken forward towards aligning the headline inflation to the 4 per cent target on a durable basis. The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability.