RBI’s monetary policy committee chose growth over inflation for rate cut

Minutes of monetary policy committee’s first meeting show that it saw downturn in retail inflation, slack in economy as an opportunity for a rate cut


RBI governor Urjit Patel. All six members of the monetary policy committee voted on 4 October to cut the repo rate by 25 basis points. Photo: Abhijit Bhatlekar/Mint
RBI governor Urjit Patel. All six members of the monetary policy committee voted on 4 October to cut the repo rate by 25 basis points. Photo: Abhijit Bhatlekar/Mint

Mumbai: India’s new monetary policy committee (MPC) was concerned about economic growth, and saw the downturn in retail inflation and slack in the economy as an opportunity to cut the key policy rate, according to the minutes of its first meeting released on Tuesday. All members leaned heavily on the Reserve Bank of India’s (RBI’s) staff surveys and reviews, which some analysts saw as a negative.

All six members of the MPC voted on 4 October to cut the repurchase rate, at which it infuses liquidity into the banking system, by 25 basis points. One basis point is one-hundredth of a percentage point.

The minutes showed that all members were reasonably sure of achieving the 5% consumer price index (CPI) inflation target by March 2017, even if some upside risks exist.

“While our model-based projections indicated upside risks to the target, a calibrated policy judgement was warranted, given that some space for policy action had opened up with the fall in inflation in the August reading,” wrote RBI governor Urjit R. Patel in his statement, citing his reasons for the way he voted.

Retail inflation fell to 5.05% in August, the last reading before the committee met. In September, it fell further to a 13-month low of 4.3% as good rains and supply management curbed food inflation.

Under the terms of the new monetary policy framework, the central bank has to target 4% CPI inflation over the medium term within a tolerance band of +/-2 percentage points. Investors will take a close look at the minutes for clues on the committee’s stance and outlook.

“While the minutes do suggest that economic growth will remain important for the monetary stance, the space and timing of the next rate cut remain uncertain,” said Aditi Nayar, senior economist at Icra Ltd.

The minutes showed that MPC members felt the pullback in inflation was real rather than merely statistical and, thus, saw space for monetary policy to support growth. External members said unutilized capacity diminished the dangers of inflation rising sharply and that economic growth needed to be supported by reducing the policy rate.

“There are signs of revival of economic activity, which needs to be nurtured,” said Chetan Ghate, another member. While there are risks to the 5% target and concerns such as high core inflation, “given the current juncture, these are acceptable risks”.

External member Ravindra Dholakia suggested that the upside risks, particularly those arising out of the seventh pay panel award, were mostly statistical and that India’s potential growth is also increasing because of reforms.

Governor Patel’s and RBI executive director Michael Patra’s statements suggested they were the most cautious.

“This is not to say that the beast (inflation) has been beaten or its back broken, but there is a turn in its momentum that is exploitable,” said Patra. He justified his decision to vote for a rate cut by saying that there was“a reasonable probability of inflation converging to its target and the economy poised on the threshold of an acceleration of growth in the next three quarters of the year”.

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Analysts said the external members gave too much weight to RBI staff surveys and reviews, and there were not enough data on their independent projections.

“The external members’ inflation and growth expectations were mostly based on RBI’s professional forecast survey, which may be speculative,” said State Bank of India’s chief economist Soumya Kanti Ghosh.

“We believe that monetary policy committee discussion and deliberations are still in an evolving stage and hopefully the external members will have their own forecast over a point of time. This will add more diversity in debate.”

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