The MPC has complex signals to decode in its rate-setting review

Repo rate increases serve little purpose when inflation is driven by adverse weather shocks to the supply of perishable foods

-  INDIRA RAJARAMAN

This morning, Friday, 6 October 2023, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will unveil its decision on the repo rate. The near-universal expectation is that the rate will stay unchanged at 6.5%.

Repo rate hikes serve no purpose when headline inflation is driven up, as from July, by adverse weather shocks to the supply of perishable foods. Nor is a repo rate reduction called for by present growth prospects, which, although perhaps lower than officially expected, are not dire.

Quick supply-side action by the government helped ease the vegetable shortage caused by unevenly distributed monsoon rains. The July headline rate of 7.44 % fell to 6.83 % in August. September rains redressed the rain deficiency in August, rated the driest in more than a century, and the next Consumer Price Index (CPI) print is expected to be lower. However, area sown to pulses, largely grown on unirrigated land, has seen a fall of 10%. Pulse prices look set to rise, as does the price of rice.

Inflation as it is experienced differs from inflation as measured by the base-weighted CPI. The consumer adjusts to a price hike in any item by switching demand if other close substitutes become relatively cheaper. That happened with vegetables, since supply shocks across vegetables are not synchronized.