RBI governor Urjit Patel. File photo: Mint
RBI governor Urjit Patel. File photo: Mint

Urjit Patel cited lower inflation to hold rates

The Reserve Bank of India is not obliged to increase the rate at every policy meeting, governor Urjit Patel maintained

Mumbai: Reserve Bank of India (RBI) governor Urjit Patel cited moderation in inflation in the last two months and the resultant lowering of the projected inflation trajectory to keep the policy repo rate unchanged, according to the central bank’s monetary policy committee (MPC) minutes released on Friday.

RBI raised the repo rate by 25 basis points (bps) each in the last two consecutive meetings of the MPC in June and August. Retail inflation, measured by the year-on-year (y-o-y) change in the consumer price index (CPI), fell from 4.9% in June to 3.7% in August, helped by a decline in food prices.

After these two rate hikes, the RBI monetary policy committee kept key policy rates unchanged on 5 October, citing a benign inflation trajectory and downward revision to inflation projections, though the stance changed from neutral to “calibrated tightening". “Recognizing that inflation risks have been persistent, and to reaffirm the commitment to securing the mandated 4% inflation target on a durable basis, it is apposite to change the stance of monetary policy from ‘neutral’ to ‘calibrated tightening," said Patel.

Calibrated tightening means that a cut in the policy repo rate is off the table in the current rate cycle, while the RBI is not obliged to increase the rate at every policy meeting, he explained.

The six-member MPC had voted 5-1 to keep the repo rate unchanged at 6.5%. For the first time, RBI executive director Michael Patra, known to be the MPC’s most hawkish member, voted in favour of a pause, while calling for a shift in stance to calibrated tightening.

Deputy governor Viral Acharya said that since the August policy, food inflation has been dramatically on the downside. “Seasonal pickup in prices of vegetables and fruits in summer months was simply missing due to a combination of increased mandi arrivals, export policies and other supply management measures," said Acharya.

This, coupled with a normal monsoon, Acharya said, had shifted RBI’s food inflation projections significantly downward. The likelihood of oil prices remaining elevated rules out a rate cut anytime soon, he said.

It is important to signal the RBI’s commitment to keep to the mandate and move forward carefully at an appropriate time, given the flexible inflation targeting mandate of the MPC, Acharya said. This, he said, will allow the economy to adjust to the past two back-to-back rate hikes while being vigilant about any emerging inflationary pressures.

Chetan Ghate was the only member of the MPC to vote for a 25bps rate hike. He said that the appropriate “risk-management approach" would be to act and, therefore, the RBI should not allow the commitment to the 4% inflation target to be flexible. One basis point is a hundredth of a percentage point.

On 5 October, the MPC lowered its inflation projection to 3.9-4.5% from 4.8% for the second half of the current financial year. The panel also highlighted its concerns on a possible growth slowdown on account of several headwinds, including high oil prices, volatile global financial markets, intensifying trade wars and growing uncertainty in the domestic financial landscape.