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The first of the six bimonthly meetings for FY 2024-25 of the Monetary Policy Committee, which sets the policy interest rate (MPC) of Reserve Bank of India (RBI) valid for two months (April and May) is scheduled to be held on April 3-5.

The current policy interest rate (known as REPO) is the interest rate in the repurchase operations (in government securities held by commercial banks and other authorized institutions), a form of short-term borrowing for a period of,

not more than three months). It is the rate at which RBI lends to banks and authorized financial sector institutions against government securities. A reverse action indicates tightening the money supply. Thus, it serves as a lighthouse signal around which all interest rates, lending and deposit rates revolve around. Essentially, the REPO serves as a monetary policy indicator. Rise in RPO reflects tightening monetary policy stance and decrease indicates expansionary stance.

Anti-inflationary measures

The RBI has been fighting inflation since late 2021, as the Covid-19 pandemic was on the decline and recovery of sorts showed up. Inflation flared up in March 2022, when Russia-Ukraine war began and soon affecting supplies of wheat to Europe and energy products, especially petroleum as Russia crude was a major exporter besides OPEC. The war, which is officially still on, has disrupted global supply lines. Table 1 provides information on rising inflationary trends over the last two years (2022-2023) in major economies and India and efforts to contain inflation through monetary policy changes. In the measurement of monthly inflation, annual percentage changes in the

consumer price index (CPI) of a given month over a twelve-month CPI, is calculated. It is known as headline inflation.  However, two components of products of consumptions are subject to a high degree of volatility in prices. The first category is food grains and vegetables and fruits, which are affected by seasonal weather patterns; l and the second category is petroleum crude and refined energy products whose prices are determined by supply conditions (wars and conflicts); and restrictive pricing practices by oligarchy of producers and exporters. The food inflation and fuel inflation, both are separately calculated and reported. Table 2 gives an updated Inflation data of India. It is split into food inflation, core inflation which is measured excluding both food and fuel, and headline (CPI based all final consumption products) inflation. The data period will cover only up to February 2024.

The scheduled April first week MPC meeting would have to decide on the basis of February data, as March data on inflation would be available only in the second week. The February inflation (5.09%) fell only marginally from January (5.10%). So, MPC has no clear downward trend in inflation. In the absence of any definite sign of a falling trend in inflation, it would be hazardous to make any move towards relaxing the monetary policy anytime soon. In fact, both the Bank of England (with inflation falling from 4.00% in January to 3.40% in February) and the Eurozone central bank (with inflation falling from 2.80% in January to 2.60% in February) have resisted any temptation.  Further the US Federal Reserve had a clearer case: its February inflation was higher (3,20%) than January inflation (3.10%.). On the common ground, the inflation target (2%) of the three advanced countries’ is still far off.  None of them is inclined in terms of relaxing the grip on anti-inflationary measures they embarked on a year ago.

Last MPC meeting in February

In regard to India, it would be appropriate to refer to MPC minutes of the last February meeting.  According to the minutes of the meeting released on February 22, MPC members remained cautious on inflation prints due to uncertainty in food prices.

The RBI Governor Shaktikanta Das noted that food price uncertainty remains a major source of volatility for headline inflation outlook. Growing geo-political tensions and supply chain disruptions due to new flash points also pose further risks to the inflation outlook”. The Deputy Governor Michael Debabrata Patra added that monetary policy must remain restrictive and “maintain downward pressure on inflation while minimizing the output costs of disinflation,”. It was agreed that recurring food price shocks could interrupt the ongoing disinflation process, with risks that could lead to de-anchoring of inflation expectations and generalization of price pressures.

There is no major change in domestic factors. The weather-related disturbances (impact of unexpected heavy rains in January, and low reservoir levels in Maharashtra, Gujarat and West Madhya Pradesh) and the El Nino phenomenon, which affected the supply situation have continued to be causing concerns. These uncertainties led the RBI to continue tightening policy for another two months till April 2024. 

Prof Ashima Goyal, the non-official of MPC who voted to keep the interest rate at 6.50%, in her speech at a conference on monetary policy in Kozhikode on February 15, noted that food inflation came down from 9.53% in December 2023 to 8.30% in January 2024; and headline inflation fell from 5.69% in December 2023 to 5.10% in January 2024. 

However, the latest data (Table 2) reveals food inflation flared up in February. It rose to 8.66%, in February. The silver line among the clouds is the core inflation has fallen to 3.30% in February from 3.60%. However, the headline inflation is still almost the same: 5.10 %. 

Global factors

Commodity prices, notably food grains and sugar and other agriculture related raw materials including cotton and rubber are looking up. Minerals like crude oil and copper also are rising. One of the dominant reasons is the El Niño. The major victim is cocoa and its price has doubled globally in a year and is at a record high., The UN FAO estimates

Africa (33 countries) and four South American countries (Colombia, Ecuador, and Peru) will see substantial loss of output. Besides weather, we have manmade uncertainties stemming from geopolitical factors, which include wars and conflicts, raising shipping costs. The IMF has issued warnings “of continued attacks in the Red Sea — and supply disruptions or more persistent underlying inflation could prolong tight monetary conditions.”

An important factor, not very usual, we are now facing this election year for 64 countries, which account for about 50% of world population: Protectionist policies are re-gaining seasonal recognition: no more free trade! It is now: “Save local jobs!”. With about 60 countries along with the EU (comprising all half of the global population), the political atmosphere is switched on to slogans of self-sufficiency. In recent years we have witnessed export restrictions on food grains and vegetables; and frequent potato famine and onion wars. Statistics on them reveal that export bans on rice and wheat resulted in increase in prices by about 12% and 9% . In these circumstances, it will be no surprise if the MPC of the RBI sticks to “no change in REPO”.

A last word!

Will RBI realize the need for changing the bimonthly MPC meeting dates to the third week of the month? They will surely have fresh inflation data of two full months.