RBI MPC meets amid uptick in food inflation; rejig of rate-setting panel looms

The rate-setting panel of the Indian central bank, Reserve Bank of India (RBI), is facing another food-driven inflation spike as it meets for the last time before the exit of the committee’s external members. It is the first of the many key policymaker changes scheduled over the next few months.

The Monetary Policy Committee (MPC) meeting of the RBI is scheduled to start on August 6 and the interest rate decision will be announced on August 8, at around 10 AM.

The MPC, also referred to as the rate-setting panel, includes six members – three RBI officials and three external members. The committee is revised once in every four years when the government selects a new set of external members.

The recasting of the MPC could result in the change in a recent disagreement among the panellists where two out of the six members of the committee voted in favour of bringing a 25 basis points repo rate cut arguing that ‘high inflation adjusted real rates could hurt the economy's growth outlook’, according to a report by news agency Reuters.

The majority maintained their focus on bringing the inflation rate down to the 4% target, which has been a struggle to achieve during the pandemic, war and weather-related challenges.

This was a global problem, said Madhavi Arora, chief economist at Emkay Global to Reuters. "Globally goods inflation went through the roof, there was a supply problem, so very little they could do," Arora said.

Status quo to remain?

The panel is expected to keep the rates constant for the eighth consecutive meeting on August 8 as the inflation rate has stayed above 5% in June, according to a poll by Reuters.

According to analysts, the new committee could have a different view, focusing on economic conditions across the world. They suggest that concerns related to a global economic slowdown might prompt the US Federal Reserve to cut down the interest rates in September.

“Even within the current framework of targeting headline inflation, committee members can choose to take a more dovish view,” Kaushik Das, chief economist India and South Asia at Deutsche Bank, told Reuters.

He added that there is a scope for monetary easing if the RBI works with the lower range of the neutral real rate and the food price volatility eases up in the near future, providing comfort to the central bank and aiding its aim to meet the inflation target.

However, RBI chief Shaktikanta Das has maintained on several occasions the need to stay focused on achieving the 4% inflation target consistently before changing policy.

The process of selecting the new external members has not begun officially but the appointments will be made most likely by the end of September, a government source told Reuters.

Top deck changes

After the three external members leave the committee, many other key officials are due to exit their posts.

The second term of governor Das is due to end on December 10, and while a third term is possible, it would be the first time ever for a governor to hold a third term as the RBI governor.

In January 2025, a month after Das’ term ends, his key deputy Michael Patra who heads RBI’s monetary policy division will also finish an extended term.

Rajeshwar Rao, who heads the banking regulation department, is due to complete his term in October 2024 and the chief economic advisor of the country, V. Anantha Nageswaran, will complete his tenure in January next year.

“Extensions or new appointments should be concluded and announced well ahead avoiding last minute delays,” said Shubhada Rao, founder of economic research firm QuantEco Research to Reuters.