He also said that there is an immediate need to change the stance formally from calibrated tightening to neutral and cut the policy rate by 25 bps.
The Reserve Bank of India (RBI) on February 21 released the minutes of the meeting for the 15th Monetary Policy Committee (MPC) meeting that took place between February 5 to February 7.
According to the minutes, Ravindra Dholakia said, "I think space has opened up for a substantial rate cut of about 50 to 60 bps going forward."
Dholakia said that oil prices are expected to stabilize at about $60 to $65 per barrel, food prices are likely to remain subdued over the next 3-4 quarters, and the inflation rates excepting food and fuel are also predicted to fall from its current level of about 5.9 percent in Q3 FY19 to about 5.1 percent in Q3 FY20.
Dholakia said that it was due to these factors that the headline inflation forecast for one year ahead by the RBI staff has turned out to be less than the target of 4 percent for the first time.
“With the policy rate of 6.5 percent, this implies the real policy rate of about 2.6 percent, which is one of the highest in the world as I have been arguing. We do not need such a high real policy rate,” he said.
RBI Deputy Governor Viral Acharya noted that the said that inflation excluding food and fuel remains elevated and persistent, and it remains crucial to understand if the sharp increase in momentum observed in health and education components is one-off, and suggested a wait and watch approach.
Acharya said that the recent fiscal support may stoke rural demand, and lift wages, whereas the impact of the CPI inflation can warrant a rate hike over 12 months.
He also said that international Brent crude prices have stabilised in the short run, but one cannot discount the"Wild gyrations from geopolitical risks, as were observed over the past six months."
"Given our oil imports and the implied current account deficit effects,headline inflation responds particularly adversely to upside risk from crude oil prices," he said.
"Combining my inflation and growth assessments, and given the Monetary Policy Committee (MPC)’s mandate to target headline inflation at 4 percent on a durable basis while paying attention to growth, I prefer to 'take off the helmet' but 'stay within the crease.'"
Acharya meant that he voted for a change in the stance from “calibrated tightening” to “neutral”, but to hold the policy rate at 6.5 percent.
The MPC voted to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 percent to 6.25 percent, and also decided to change the monetary policy stance from calibrated tightening toneutral.
