Greater vigil for signs of persisting food inflation

livemint.com:

MUMBAI : The Monetary Policy Committee (MPC), as widely expected, maintained status quo on policy actions, voting unanimously to hold the repo rate at 6.5%. The stance remained “focused on withdrawal of accommodation", with one dissent. On liquidity management, the instrumentality of the 10% incremental cash reserve ratio (CRR) was a bit of a surprise.

Some measure to reduce the durable system liquidity had been expected, which, post the return of the large denomination currency notes, had tended to exceed the threshold of “neutral" liquidity, which in the past had been estimated at 1-1.5% of bank deposits (net demand and time liabilities). This measure, which will be reviewed on 8 September, is expected to extract about ₹1 trillion for the duration of the measure remaining in force. This measure is similar to the 100% incremental CRR introduced from the fortnight of 26 November 2016 (post-demonetization) and which remained in place till the fortnight beginning the 10 of December 2016, a relatively short period.

Keenly awaited from this review was the language and syntax of the statement, in terms of implicit forward guidance for signals of MPC’s thinking on the future trajectory of policy. On balance, financial conditions have eased over the past month. With ample system liquidity, overnight and money market rates had moved closer to the standing deposit facility (SDF) rate, below the policy repo rate.

Any softening of language would have hindered anchoring inflation expectations. The hawkish tone has, in fact, hardened relative to the two previous reviews. The statement reiterated MPC’s commitment to closely monitor the evolving price dynamics and inflation outlook, while remaining watchful and proactive in dealing