Vigilant on potential generalisation of inflationary pressures: MPC minutes
T
he Reserve Bank of India's Monetary Policy Committee (MPC) has decided to remain vigilant about the potential generalisation of inflationary pressures as several factors such as higher telecom charges, among others, appear to be operating in concert.
In the minutes of the MPC meeting held from February 4-6, the committee noted that inflation has surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices.
"Over the coming weeks and months, onion prices are likely to ebb as supply conditions improve. The salutary effects on headline inflation are, however, likely to be tempered by hardening of prices of other food items, notably those of pulses and proteins," the minutes said.
"Meanwhile, adjustments to telecom charges are imparting cost-push pressures to CPI inflation excluding food and fuel," the minutes added.
Going forward, the minutes said that MPC trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation.
"The MPC anticipates that the combination of these factors may keep headline inflation elevated in the short-run, at least through H1 2020-21. Overall, the inflation outlook remains highly uncertain.
"Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert," the minutes said.
At the same time, the MPC observed that the economy continued to be weak and the output gap remained negative.
"While some high-frequency indicators have turned around and point to a lift in the momentum of economic activity, there is a need to await incoming data to gauge their sustainability. Financial flows to the commercial sector have improved in recent months.
"The Union Budget 2020-21 has introduced several measures to provide an impetus to growth. While the emphasis on boosting the rural economy and infrastructure should help the growth momentum in the near-term, the corporate tax rate cuts of September 2019 should help boost the growth potential over the medium-term," the minutes said.
Furthermore, the MPC noted that while there is a need for adjustment in interest rates on small saving schemes, the external benchmark system introduced from October 1, 2019 has strengthened monetary transmission.
Additionally, the MPC recognised that there is policy space available for future action.
On February 6, the RBI kept the repo, or its short term lending rate for commercial banks, unchanged at 5.15 per cent in its sixth and final review of the current fiscal.
✔️ Vigilant on potential generalisation of inflationary pressures: MPC minutes
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