MPC minutes show RBI still on the dovish side

The RBI announces the minutes of the Monetary Policy Committee exactly 14 days after the announcement of the monetary policy. The minutes of the MPC meet held on 10-Feb were announced on 24-February. Broadly, the MPC expects inflation to peak in Q4 of the current fiscal ending Mar-22 and gradually taper after that. That is debatable considering the steep spike in crude prices, but we shall leave that aside for the time being. 

In his summing up remarks, the RBI Governor, Shaktikanta Das, cautioned that the RBI would continue to be watchful of the risks to domestic inflation arising from an upward spike in international commodity prices. This was made in the light of the worsening situation in Ukraine at that point of time, which has since degenerated into a full-fledged war. It may be recollected that MPC had chosen to persist with rates and stance.
 

Check - RBI Monetary Policy Highlights

A key pointed by MPC member, Dr. Mridul. Saggar, was that the uncertainties surrounding energy prices had gone up considerably since the start of the new year 2022. In fact, oil is up nearly 33% since the start of the year. The problems in Ukraine threaten the price of oil and gas in Europe and that promises to escalate the prices of inputs across the spectrum. Oil prices are already at $103/bbl and the market is still sharply undersupplied.

One of the big bets that most MPC members were relying on for tapering inflation was the supply side measures initiated by India especially in specific areas like edible oil. However, the fear is that a lot of these advantages could get offset by the rise in crude prices. Also, the inflation impact in India could be felt when the prices of petrol and diesel are raised after the campaigning for elections is completed in March 2022.

Here are some key points emanating from the MPC minutes

1) Supply side measures are distinctly softening prices of pulses and edible oil and that is likely to have a positive impact on food inflation. The focus continues to be on supply side interventions and enhancing domestic production. 

2) One of the major highlights of the MPC meet was that recovery in domestic economic activity was not yet broad-based, since private consumption was tepid and contact-intensive sectors were still way below the 2019 levels of output.

3) Global financial market volatility is likely to be underscored by higher commodity prices, especially crude oil, as well as constant supply side disruptions as well as the risk of monetary divergence.

4) The MPC has also underlined that the lag effect of COVID-19 continues to impart some uncertainty to the future outlook. For now, the broad judgement is that the ongoing domestic recovery is still incomplete and would need continued policy support.

The sold voice of dissent came from Dr. Jayanth Varma, the MPC members who has always had an objection to the idea of giving the market a virtual assurance that the RBI would continue to keep the stance accommodative.

Varma specifically pointed out that the shift from an accommodative stance to a neutral stance should have happened a long time back, when the entire world was already beginning to warn people about possible hawkishness.