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Business News/ Industry / Banking/  Monetary policy panel cites inflationary risks as reason for RBI rate hike
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Monetary policy panel cites inflationary risks as reason for RBI rate hike

MPC members raised concerns about the risk to inflation due to factors, including the impact from minimum support price rises for crops and elevated crude oil prices

Five out of the six Monetary Policy Committee members voted for a rate increase at the August meeting and retaining the RBI’s neutral policy stance amid various uncertainties on the growth front. Photo:Premium
Five out of the six Monetary Policy Committee members voted for a rate increase at the August meeting and retaining the RBI’s neutral policy stance amid various uncertainties on the growth front. Photo:

Mumbai: Members of the Reserve Bank of India’s Monetary Policy Committee expressed their concerns about meeting the medium-term inflation target, given that headline inflation had been above the 4% target for seven out of the past eight months, according to the minutes of the meeting released on Thursday. Members believe this is likely to dent the credibility of the RBI as a central bank that targets inflation.

“The risk of failing to achieve the inflation target, and of being perceived as willing to accommodate deviations over the remaining period for which the MPC is tasked, has increased significantly. This could unhinge inflation expectations, dent the credibility of the MPC and allow inflation outcomes to test the upper tolerance band," said RBI executive director Michael Patra, also an MPC member.

On 1 August, the MPC voted 5-1 to raise policy rates by 25 basis points to 6.5%, for the second consecutive time since October 2013. However, it kept the policy stance neutral, pointing to a potential impact of trade tensions between the US and China.

All MPC members, excluding Ravindra Dholakia, reasoned that inflation will increase in the second half of the year, given the uncertainties around the implementation of the minimum support price (MSP) and crude oil price. Accordingly, RBI revised its consumer inflation projection for the second half to 4.8% from 4.7%. The central abnk expects it to further rise to 5% in the first quarter of next fiscal.

“Households and professional forecasters are anticipating it, corporates are reporting rising input costs, which could swiftly translate into pricing power as the output gap closes and demand pressures build up. Consumers are pessimistic about the future course of the price situation," according to Patra.

Dholakia, who had called for a rate hike in the June policy, said the RBI’s inflation forecast takes into account a “remotely possible impact" of MSP revisions on headline inflation. He argued that it would be prudent to wait for the implementation of MSP in November, before taking a call on policy rates. He also explained that the 12-month ahead inflation was likely to be lower than the RBI’s forecast, hinting that the central bank’s forecasts had been inaccurate versus inflation data in the past.

“The argument of a pre-emptive consecutive rate hike at this stage pre-supposes: (a) complete failure of the rate hike effected in the June 2018 policy on impacting the inflationary expectations in the economy, and (b) headline inflation forecasts ex-house rent revisions a year ahead increasing further without any uncertainty. Neither of these two pre-suppositions is correct," said Dholakia.

On growth, except Dholakia, all MPC members believe GDP is likely to pick up in 2018-19, compared with the previous year, even as the drivers of growth are unclear. Dholakia, on the other hand, argued that capacity utilisation has fallen sharply by 130 basis points according to RBI’s survey, signalling a slowdown in growth. He also said that investment by companies is likely to fall during 2018-19 as revealed by pipeline projects.

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ABOUT THE AUTHOR
Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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Published: 16 Aug 2018, 06:55 PM IST
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