New Delhi, August 24 (IANS) RBI Deputy Governor Michael Patra has said that a major risk to inflation outlook stems from the liquidity overhang in the banking system, according to the minutes of the central bank’s Monetary Policy Committee (MPC) meeting, which were released on Thursday.

At the meeting, which was held between August 8 and August 10, Patra said that withdrawal of excess liquidity should engage primacy in the attention of the RBI going forward as it presents a direct threat to the RBI and MPC resolve to align India’s inflation with the target, besides the potential risks to financial stability.

“While unanticipated and short-lived supply demand mismatches lie outside the realm of monetary policy, the commitment to price stability requires the RBI to see off these price perturbations by guarding against spillovers -- in India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation,” he noted.

Patra said during the meeting that ensuring sustained easing of core inflation is crucial to the MPC’s objective of bringing inflation down to the target.

“This objective should not be undermined by supply shocks that show any signs of persisting and getting broader-based. Accordingly, I vote for maintaining status quo on the policy rate and for persevering with the withdrawal of monetary policy accommodation,” he said, as per the MPC’s minutes.

The MPC members had unanimously decided to keep policy rates unchanged at 6.50 per cent.

The committee is led by RBI Governor Shaktikanta Das.

As per the minutes, Das was quoted as saying that headline inflation has softened from last year’s elevated level but it still rules above the target.

“Our task 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. 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,” the RBI Governor said.

The impact of the cumulative rate hike of 250 basis points on the economy is still playing out. Considering all these aspects, he voted to keep the policy repo rate unchanged at 6.50 per cent with preparedness to act, should the situation so warrant, as per the minutes of the MPC meeting.