RBI policy panel cites inflation concerns
MUMBAI: Four out of six members of the monetary policy committee (MPC) were in favour of changing the monetary policy stance to neutral from accommodative on 7 February, according to minutes of the meeting released on Wednesday.
The main argument for a change in stance was stubborn inflation, mainly core inflation. This, coupled with the impact of remonetisation of the economy could result in hardening of the headline inflation number, according to the MPC minutes.
While independent member Ravindra Dholakia, Reserve Bank of India executive director, Michael Patra, deputy governor, Viral Acharya and governor Urjit Patel all were in favour of a change in stance, the remaining two independent members Pami Dua and Chetan Ghate also agreed that inflation continued to remain stubborn.
“The tailwinds that propelled inflation down through 2014-17, some fortuitous like the collapse of international commodity prices, do not appear to be in sight over the next 12-month horizon. Instead, upside risks from global financial turbulence, international crude prices and a less than normal south west monsoon could individually materialise and even intensify together into a perfect storm,” Patra said in his observations.
While announcing the monetary policy, Patel had said that all six members had agreed to hold the repo rate at 6.25%.
While the central bank expects inflation to be around 4-4.5% for the first half of 2017-18 and 4.5-5% in the latter half, MPC flagged some risks.
The MPC minutes note three significant upside risks that impart some uncertainty to the baseline inflation path – the hardening profile of international crude prices; volatility in the exchange rate due to global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowance under the 7th Central Pay Commission (CPC) award, which have not been factored in the baseline inflation path.
“The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation,” the minutes noted.
Patel, as part of his statement in the MPC, noted that discretionary consumer demand, which got impacted in the immediate aftermath of demonetisation, is expected to bounce back.