RBI's MPC to closely monitor food price spike to gauge inflation impact

India's monetary policy committee (MPC) will closely monitor the factors impacting inflation and take necessary action, although it expects the recent spike in food prices to be short-lived, minutes of the latest MPC meeting showed.

"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 Reserve Bank of India (RBI) governor, Shaktikanta Das, wrote in the minutes of the MPC's August meeting released on Thursday.

Das also pointed to the need for sustained supply-side measures to prevent the spiralling of frequent food supply shocks into generalised economy-wide price impulses.

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.

However, Deputy Governor Michael Patra said a risk to the inflation outlook also stems from the liquidity overhang in the banking system.

"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 the potential risks to financial stability".

India's annual retail inflation spiked to 7.44% in July, its highest in 15 months, as prices of vegetables and cereals skyrocketed.

The government has stepped in to alleviate the price shocks by imposing bans on non-basmati white rice exports and a 40% duty on export of onions.

Jayant Varma, an external member of the MPC, said the current level of policy rates should help rein in the price pressures.

"I am of the view that the current level of the repo rate is high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band," Varma wrote.