RBI turns hawkish on high inflation expectations
MPC MINUTES One member had suggested a hike in repo rate to rein in prices
MUMBAI: The minutes of the monetary policy committee (MPC) meeting held on April 5 and 6 show that one of the six members had suggested an increase of 25 basis points (bps) in the repo rate, but eventually changed his vote to hold the policy rate.
Even though all six members eventually voted to hold benchmark policy rate, the tone of the comments made has become increasingly hawkish.
“I believe that a pre-emptive 25 basis points increase in the policy rate now will point us better at the target of 4% to which the committee has committed explicitly. It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched,” said Michael Patra, executive director, RBI in his comments before voting on the repo rate.
“On balance, however, I vote for holding the policy rate unchanged in this bi-monthly meeting and await a few more readings of incoming data so that remaining transitory factors have passed and a clearer assessment of domestic and global macroeconomic conditions emerges,” Patra added.
On April 6, while announcing this financial year’s first monetary policy decision, Reserve Bank of India (RBI) governor Urjit Patel said that the MPC had had decided to keep the benchmark policy rate, or the repo rate, fixed at 6.25%, while hiking the reverse repo rate to 6% from 5.75% earlier.
The minutes show that all members had noted the sticky nature of inflation which could become an impediment on the MPC’s target of reaching a 4% consumer price inflation (CPI) number by March 31, 2018.
“There has also been an inching up in the median 3 month and 1 year ahead inflationary expectations. The recent decline in headline inflation has been driven completely by food inflation and is likely to reverse in the summer months,” Chetan Ghate, a professor at the Indian Statistical Institute and one of the three external members of the MPC said.
According to Ghate, the house rent allowance (HRA) increase prescribed under the 7th Pay Commission would be important to study, to understand the way in which inflation impact would pan out in the coming months.
“Our focus on meeting the medium-term inflation target should remain laser sharp in light of such risks,” Ghate said.
While external member Pami Dua, director and professor at the Delhi School of Economics agreed with the assessment that there is a probability of a rise in inflation, while Ravindra H Dholakia of the Indian Institute of Management in Ahmedabad, stated that he expects the inflation to decline over the next year.
RBI Deputy Governor, Viral Acharya noted that there is some uncertainty as to when the headline inflation might cross the target inflation rate of 4%, however, he maintained that the risks on inflation are evenly balanced out.
Acharya also pointed out that there are other major issues which the central bank should concern itself with, including the increasing stressed asset problem in the banking sector, the deepening of the corporate bond market, improving financial hedging options and mopping up surplus liquidity in a more durable manner.
“It seems an opportune time to focus on these issues,” Acharya said.
RBI governor Urjit Patel believes that there is a need to keep a close watch on the way inflation is progressing.
“Notwithstanding likely favourable base-effects in the next few months, the outlook for inflation calls for close vigilance with a view to ensuring that the medium term inflation trajectory evolves in line with the objective of bringing headline inflation closer to 4.0% on a durable basis and in a calibrated manner,” Patel said, according to the minutes.