MPC Minutes: Excess liquidity on RBI radar
inflation stoked by vegetable prices, but steps to reduce liquidity overhang in the banking system are likely to help contain price pressures, minutes of its August 8-10 meeting showed.
«Given the likely short-term nature of the vegetable price shocks, monetary policy can look through the first-round impact of fleeting shocks on headline inflation,» Reserve Bank of India (RBI) Governor Shaktikanta Das said in the minutes. «At the same time, 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.»
'Similar Prognosis Earlier Proved Right'
India's Consumer Price Index inflation surged to a 15-month high of 7.44% in July, shooting past the MPC's tolerance band of 2-6%.
The MPC's inflation target is 4%. From mid-June to end-July, prices of tomatoes shot up nearly five times, with more than 80% of the rise occurring in the end of June and the first half of July, RBI executive director Rajiv Ranjan said.
«If monetary policy responds to such a surge in headline inflation, the policy would likely be excessively tight and induce high volatility in macroeconomic conditions… It may be noted that on the earlier two occasions, during mid-2020 and during mid-2021, the MPC's prognosis of looking through transitory pressures on inflation has in fact proved accurate,» Ranjan said.
MPC members highlighted the importance of bringing down surplus liquidity in the banking system, as excess funds with lenders pose risks to both inflation and financial stability.
