Optimal policy position

MPC should focus on inflation management

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The headline inflation rate for June increased to a four-month high of 5.08 per cent as against 4.8 per cent in the previous month. The rate is well above the Reserve Bank of India's (RBI's) inflation target of 4 per cent. However, there is a view in the market that since the core inflation rate, which does not account for more volatile components like food and fuel, has drifted to about 3 per cent, there is a case for the Monetary Policy Committee (MPC) to reduce the policy repo rate. The headline rate is being driven primarily by food prices, largely because of supply-side issues, and monetary policy has limited impact in such conditions. The food inflation rate in June was above 9 per cent. While there are strong reasons why the MPC should not be in a hurry, new research strengthens the MPC's majority position on the policy rate.