MPC minutes show four members sought change in policy stance

RBI’s monetary policy committee voted 6-0 to hold the repo rate unchanged at 6.25%, while stunning markets by changing the stance to ‘neutral’


The RBI minutes showed widespread discomfort about retail prices among the 6 MPC members, with all of them citing concerns that inflation could quickly accelerate and threaten the RBI’s medium-term target of 4%. Photo: Mint
The RBI minutes showed widespread discomfort about retail prices among the 6 MPC members, with all of them citing concerns that inflation could quickly accelerate and threaten the RBI’s medium-term target of 4%. Photo: Mint

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 remonetization 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 materialize and even intensify together into a perfect storm,” Patra said in his observations.

While announcing the monetary policy, governor Patel said all six members had agreed to hold the repo rate at 6.25%.

While RBI expects inflation to be around 4-4.5% for the first half of fiscal 2018 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 on account of 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.

MPC said it remains committed to bringing headline inflation closer to 4% on a durable basis and in a calibrated manner. “The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetization on inflation and the output gap play out,” according to the minutes.

Patel, as part of his statement, noted that discretionary consumer demand, which got impacted in the immediate aftermath of demonetization, is expected to bounce back.

“With the remonetization of the economy taking place at an accelerated pace over the last two months, economic activity is expected to pick up from the latter part of Q4 of 2016-17,” Patel said.

While the RBI expects gross value added (GVA) growth for 2016-17 to be lower at 6.9%, the improvement in growth conditions should lead the 2017-18 number to be at 7.4%, with risks evenly balanced, it said.

In his remarks, Acharya also pointed out that the high level of bad loans in the banking system and the recapitalization of public sector banks had stunted credit growth in the sector.

“...the normalization of administered small savings rates that have prevented a seamless transmission of monetary policy to bank funding and lending rates,” the deputy governor said.

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