The members of the Reserve Bank of India’s (RBI) rate-setting panel have shifted their policy stance and voted for a Cash Reserve Ratio (CRR) cut, anticipating that food inflation, which remains in the low double digits, will ease in the fourth quarter of the current financial year.
The Monetary Policy Committee (MPC) also noted that high prices have contributed to a demand slowdown, with aligning inflation to the central bank’s 4% target deemed crucial for sustaining economic growth, according to the minutes of the December policy review.
In a 4:2 vote, the panel opted for a 50 basis points (bps) CRR cut to 4% rather than a 25 bps reduction in the repo rate, which was advocated by two of the three external members. The RBI later described the CRR cut as part of normalisation to historic levels and aimed at addressing liquidity concerns, particularly given the heavy tax outflows expected in December.
“Moderation in food inflation can be expected in Q4 due to correction in vegetable prices, robust kharif harvest arrivals, a likely good rabi crop, and adequate cereal buffer stocks,” said RBI Governor Shaktikanta Das in the December policy minutes.
External MPC member Nagesh Kumar added, “Keeping in mind the easing of vegetables and edible oil prices in November, food inflation should ease further in the coming months.”
In November, retail inflation eased to 5.41%, down from a 14-month high of 6.2% in October, as food prices cooled to 9% from 10.9%.
Das expressed optimism, stating, “Inflation is likely to remain broadly contained as the disinflationary effect of past monetary policy actions continues to play out. On balance, headline inflation is expected to ease to 4.5% in Q4 and further to 4% by Q1 of the next fiscal year.”
