Monetary policy committee members flagged rising crude oil prices, likelihood of a fiscal slippage and rising inflationary expectations of households as reasons to stay put on rates
Most members of the Reserve Bank of India’s (RBI’s) rate setting committee are increasingly worried about fresh risks to inflation, with their hawkish tone suggesting that the rate cutting cycle has come to an end.
The monetary policy committee members flagged rising crude oil prices, the likelihood of a fiscal slippage and rising inflationary expectations of households as reasons to stay put on rates, show the minutes of the last meeting, released on Wednesday.
On 6 December, five out of the six members—with the exception of Ravindra H. Dholakia, professor at the Indian Institute of Management, Ahmedabad—chose to keep the benchmark repo rate unchanged at 6%. The committee also maintained its neutral policy stance while raising its fiscal second-half inflation estimate range marginally to 4.3-4.7%.
The central bank has a medium-term Consumer Price Index-based (CPI-based) inflation target of 4%.
“The time has come for monetary policy to take guard and be ready to go out on the front foot," said Michael D. Patra, an executive director with RBI, the minutes showed.
He said that with a 2 percentage points cut in the repo rate so far, “it is time now to signal its end and commence the withdrawal of accommodation".
Chetan Ghate, professor at the Indian Statistical Institute, highlighted that risks to inflation are “becoming generalized and need to be watched carefully".
Retail inflation measured by the Consumer Price Index jumped to a 15-month high of 4.9% in November. Apart from higher crude oil prices owing to production cuts agreed to by the oil producing cartel OPEC, global financial instability owing to the withdrawal of easy monetary policy by advanced economies was also cited as a risk to inflation.
“There seems little scope for accommodation or for change of stance at the present juncture," said RBI deputy governor Viral Acharya.
Economists said the minutes seemed to suggest that members will wait for more data.
“The minutes seemed to suggest that an extended pause is a given," said Gaurav Kapur, chief economist with IndusInd Bank. “The next action will be determined by growth or lack of it."
Members were worried about the uncertain growth recovery, although some highlighted mitigating factors.
RBI governor Urjit Patel wrote that the acceleration in economic growth in the September quarter (to 6.3% from 5.7% in the preceding quarter) was comforting because it “was underpinned by a sharp increase in manufacturing."
Others highlighted the recent reduction in goods and services (GST) rates, bank recapitalization plans and improving credit metrics in distressed sectors as factors that could pave the way for improved growth numbers.
Dholakia disagreed with the consensus view on both growth and inflation assessments.
He pointed to the low capacity utilization level of 72% and persistent presence of an output gap (the economic measure of the difference between the actual output of an economy and its potential output).
“The real cause of concern right now is the economic recovery and its slow pace," said Dholakia. “There are serious implications of keeping the real policy rate substantially higher than most other countries in the world. Currently, only 11 countries in the world have a positive real policy rate and several of them either are in some crisis or have recently emerged out of a crisis."
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