Mumbai: One member of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) called for the rate-setting panel to be prepared to raise rates while voting to keep interest rates unchanged in the October policy review, according to the minutes of the meeting released on Wednesday.
“I... vote for status quo, but only as long as inflation readings stay within the target of 4%. It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further," said Michael Patra, who is executive director at RBI.
On 4 October, the central bank’s six-member MPC left the key policy rate unchanged while raising its inflation target to 4.2-4.6% for the second half of this fiscal year from 4-4.5%. It also lowered its fiscal 2018 projection for growth in gross value added, a measure of economic output, to 6.7% from 7.3%.
According to Patra, all factors cited by him—the house rent allowance for government employees, the goods and service tax, the unfavourable reversal of base effects, and the seasonal spike in the prices of vegetables—played into the August inflation reading. Some of these factors will gain further traction over the months ahead, he said.
RBI governor Urjit Patel said that it is important to recognize near- and medium-term risks to inflation for keeping the Consumer Price Index close to 4% on a durable basis. “We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach," he said.
Saugata Bhattacharya, chief economist at Axis Bank Ltd, said that since most MPC members had adopted a hawkish stance on inflation, the chances of a rate cut in February have narrowed.
“The RBI will wait for a few more growth trends to emerge before taking a call on rate cut. We expect the growth numbers to pick up in the second half as the base effect wears off," he said.
Ravindra H. Dholakia, the sole dissenter in the MPC who voted for a rate cut in October, said high real interest rates had started hurting consumers and producers of durable goods and hence production.
“We also need to recognize explicitly the cost of sacrificing output growth in terms of unemployment and poverty when inflation situation is practically under control in the near to medium term," Dholakia said.
Viral Acharya, RBI deputy governor, said that it is too early to isolate the transient component of the recent one-quarter loss of momentum over and above the gradual decline in overall growth that has taken place since the first quarter. “The gradual decline... is best explained by the deleveraging underway in the heavily indebted parts of the corporate sector and in poor credit growth of public sector banks given they have inadequate capital relative to impending losses on legacy assets," he said.