RBI MPC Minutes - Likely Continuation of Growth Momentum, Firm Guard against spillovers from Persistently high Food Inflation, NIR Debate, Modest MSP Hikes

The RBI released the Minutes of Monetary Policy Committee Meeting held during 5 - 7 June 2024. The estimates of Growth and Inflation are stated below:

Key Highlights:

1. Domestic growth is likely to maintain momentum into 2024-25 aided by expectations of a above normal SW Monsoon, Government's continued thrust on capex, projections of improved Global Trade, Healthier Corporate Balance Sheet etc.

2. Pace of last mile of disinflation has been grudgingly slow on intersecting food price shocks, impact of exceptionally hot summer months, rabi production shortfall, upward revision in milk prices. Normal monsoon would likely ease price pressures and also support growth.

3. On the most interesting debate around the Neutral Real Policy Rates (NIR), Dr. Aashima Goyal mentions that NIR is around 1% for India and restated her stance 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 suggests only small steps are required to align repo rate with the fall in inflation and hence right policy communication that emphasizes rate cut action as an adjustment and not the start of a a rate cut cycle will help in sustaining growth momentum.

On the other hand, we did not get estimates of NIR as mentioned in the Post Policy Press Conference but Dr. Patra mentions, "With output in broad balance in relation to its potential, monetary policy can remain neutral to growth at this juncture and stay focused on aligning inflation to the target. That objective remains incomplete, which can undermine medium-term growth prospects."

Do Dr. Patra's remarks suggest that NIR is 2% (6.50% - 4.50%)?

4. Dr. Patra also suggested looking through the statistical soft patch (the projected dip in Inflation numbers going into Q2 on favorable base effects) and maintaining a stance ready to ward off any upticks in inflation.

5. Rising input price pressures, uptick in commodity prices and recent uptick in crude prices are risks to inflation.

Outside of the MPC Minutes, the recent MSP hike will be to the tune of Inr 2 trn (0.35 trn increase) and does not indicate a large boost to rural income - 0.35 trn increase corresponds to 12 bps of GDP. Hence, the recent MSP hike is seen as benign in the context of prices. Political continuity and absence of populist measures suggest GoI leaning towards capex thrust.

Comments

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