MPC to closely monitor first round impact of food prices, show RBI minutes

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The Reserve Bank of India (RBI) governor Shaktikanta Das said monetary policy committee (MPC) will closely monitor the first round impact of food prices, the minutes of the MPC's August meeting showed on Thursday. “Our task (of containing inflation) is still not over.

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," the RBI governor wrote in the minutes. Das also said that policymakers need to be ready to preempt any second round impact of food price shocks.

“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," Das said, as per the minutes. “While the vegetable price shocks are expected to correct quickly with the arrival of fresh crops, there are risks to food and the overall inflation outlook from El Nino conditions, volatile global food prices and skewed monsoon distribution - all of which warrant close monitoring," the RBI governor wrote in the minutes.

In July, the retail inflation soared to 7.44%, its highest in 15 months, as prices of vegetables and cereals skyrocketed. According to the minutes, the MPC, which has three members from the central bank and three external members, kept the repo rate unchanged at 6.50% in an unanimous decision.

A risk to the inflation outlook also stems from the liquidity overhang in the banking system, said RBI deputy governor Michael Patra. “Withdrawal of excess liquidity should engage primacy in the attention of the RBI going forward as it presents a direct threat to the RBI/MPC resolve to align India's inflation with the target, besides