MPC minutes give no indication of future rate action

Mumbai: In stark contrast to previous meetings of the Reserve Bank of India’s (RBI’s) monetary policy committee, the one in June gave no indication of future rate action, citing uncertainties around oil and food prices, show the minutes released on Wednesday.

However, all the members were unanimous in their readings on inflation and growth.

On 6 June RBI voted unanimously to hike policy rates by 25 basis points to 6.25%, the first increase in more than four years. However it kept the policy stance neutral, keeping options open for further rate hikes.

RBI deputy governor Viral Acharya, who had called for a change of stance to withdrawal of accommodation in the April meeting, flagged uncertainties on inflation and growth. He said that a neutral stance gave RBI the flexibility to act depending on the incoming data.

“However, considerable uncertainties around oil and food prices as well as the playing out of trade wars and global financial market outcomes led me to keep the stance neutral. It will allow the MPC to determine in a flexible manner what further monetary policy response is warranted based on an ongoing assessment of the inflation situation, inflation expectations and growth prints in the coming months,” he said.

The central bank had raised its inflation projection to 4.8-4.9% in the first half of fiscal year 2018-19 and 4.7% in the second half. Inflation has remained above the RBI’s medium-term target of 4% for the past six months.

All the members shared their concerns on increase in crude oil prices, rise in household inflation expectations, and the government’s decision on minimum support prices (MSP).

MPC member Ravindra Dholakia, who is known for his dovish stance, justified his decision for a rate hike by noting that inflation concerns need to be addressed at a time when economic growth is on a path of strong recovery. He added that the inflation rate, consistently above 4-4.5%, is a cause of concern.

“We may note that the impact on consumers’ inflationary expectations of an oil price increase is almost 4 to 5 times higher than the similar increase in food prices and, therefore, we have to consider these numbers cautiously,” said Dholakia.

Sonal Verma, chief economist at Nomura Global Markets Research, said future rate action will be data dependent.

“There has been no clarity on whether a hike will be delivered in August, which, in our view, will depend on how oil prices, core inflation and inflation expectations behave in the run-up to the meeting,” she said. “We believe the RBI will look to frontload its tightening by hiking the repo rate by 25bps (basis points) in August, before voting to pause,” she added.

On growth, MPC members noted that the decision to hike rates was premised on the sustained revival in economic activity. RBI governor Urjit Patel said economic growth continues to be resilient with GDP growth for fiscal year 2018-19 projected at 7.4%, the same as in the April policy.

“Domestic growth has strengthened with the Q4:2017-18 print at a seven-quarter high and now appears to be on a sustainable path,” he said.