The Reserve Bank of India has no power to control inflation on account of supply shortages even as it is tasked with preventing the spillover of the spike in food prices to other segments, minutes of the meeting of the bank’s monetary policy committee (MPC) showed.
The MPC at its meeting between August 8 and August 10 had retained the policy repo rate at 6.50 per cent for the third consecutive time. It had raised the inflation forecast for the year due to supply disruptions on account of adverse weather conditions, while maintaining a withdrawal of accommodation stance.
Members of the committee warned that if these supply-side disruptions leading to a rise in inflation are not controlled, it has the potential to spread to other sectors which may force the RBI to act with monetary policy measures.
According to RBI deputy-governor Michael D. Patra, while unanticipated and short-lived supply demand mismatches fall outside the purview of the monetary policy, the commitment to price stability requires the RBI to ward off these price "perturbations’’ by guarding against spillovers.
"In India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation. Ensuring the sustained easing of core inflation (ex food and fuel) is crucial to the MPC’s objective of bringing inflation down to the target,’’ he added.
Patra said the "elephant in India is the monsoon’’, with August shortfalls rendering the inflation outlook uncertain amid El Niño effects.
MPC member Rajiv Ranjan said they can do little about the first-round effect of a supply-side shock. He warned that if these shocks become persistent inflation expectations could go out of hand.
RBI governor Shaktikanta Das said: “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.’’
MPC member Jayanth R Varma was critical of the policy stance. "The disconnect between stance and action has completely hollowed out whatever meaning the stance had, and turned it into a harmless ritualism."
