On October 5, the six-member MPC decided to keep key policy interest rate or repo rate unchanged at 6.50 percent
Despite several risks to inflation going upward, the Reserve Bank of India (RBI) announced a status quo on key policy interest rate due to moderation in inflation over the last two months.
“The policy repo rate was raised by 25 basis points (bps) each in the last two consecutive meetings of the MPC in June and August. Moderation in inflation in the last two months has lowered the projected inflation trajectory. I vote for keeping the policy repo rate unchanged,” said RBI Governor Urjit Patel according to the minutes of the 13th meeting of the Monetary Policy Committee (MPC).
On October 5, the six-member MPC decided to keep key policy interest rate (repo rate) unchanged at 6.50 percent.
As the MPC Chairman, Patel said, “Recognising that inflation risks have been persistent, and to reaffirm the commitment to securing the mandated 4 percent inflation target on a durable basis, it is apposite to change the stance of monetary policy from “neutral” to “calibrated tightening”.
Calibrated tightening means in the current rate cycle, a cut in the policy repo rate is off the table, and we are not obliged to increase the rate at every policy meeting, he added.
The rate decision was 5:1 in favour of a status quo in the policy rate.
The lone dissenting member Chetan Ghate (government nominee), who voted for a rate hike and also for a calibrated tightening of the policy said, “What worries me on the pick up in growth is the dismal consumer confidence numbers, with consumer confidence in Q2 FY 18-19 worsening.”
He was of the opinion that the strong possibility of inflation expectations going up requires an appropriate “risk-management approach” and not allowing the commitment to the 4 percent target to be flexible.
The RBI revised the CPI (consumer price index) inflation projections to 3.7 percent in Q2 2018-19, 3.8-4.5 percent in H2 and 4.8 percent in Q1 of 2019-20.
Policy move on high alert
Michael Patra (RBI nominee), who usually has a hawkish stance during a policy meeting said, “Monetary policy needs to move to high alert, and this needs to be reflected in a pro-active policy stance. Overarchingly, monetary policy needs to stay focused on its mandate – the target of 4 percent inflation, while keeping in mind the objective of growth.”
Viral Acharya, RBI Deputy Governor, who voted for a pause, said, “Since the August policy, food inflation has surprised dramatically on the downside…I am particularly concerned about the near 200 bps increase in the 3-month and 12-month inflation expectations of households.”
He further said, “The likelihood of oil prices remaining elevated rules out a rate cut anytime soon…Given these factors (inflation softening, oil price rise and buoyant economic activity, and given the flexible inflation-targeting mandate of the Monetary Policy Committee (MPC), it seems important to signal commitment to keeping to the mandate and move forward carefully at an appropriate time, allowing the economy to adjust to the past two back-to-back rate hikes while being vigilant of any emerging inflationary pressures.”
Impact of MSP unrealistic?
Government nominee Ravindra Dholakia, who voted for a status quo on both rate decision and retaining the stance at neutral, said the RBI’s inflation forecast for July and August substantially exceeded the actual reading and RBI’s consideration of “impact of MSP (minimum support price) revision on inflation is unrealistically high”.
Giving specific reasons for the status quo, Dholakia said the rate of rupee depreciation is substantially lower in terms of the trade-weighted Nominal Effective Exchange Rate (NEER) because other currencies have also depreciated against the US Dollar and depreciation in NEER affects headline inflation.
The impact of House Rent Allowance (HRA) revisions have not been separated due to data problems and hence he would not consider marginal upward deviations from the targeted 4 percent as a major concern requiring any rate action.
Further, rate hike or a pause will account for several of the above factors including economic activity, oil prices and MSP impact on inflation in the next meeting of the MPC scheduled from December 3 to 5, 2018. But a rate cut is definitely not on the cards.
