Reserve Bank of India (Photo: Mint )
Reserve Bank of India (Photo: Mint )

Inflation upset RBI monetary policy panel’s rate cut plan, show minutes

  • Minutes show RBI rate-setting panel is ready to cut policy rates as soon as headroom opens up
  • Members are worried over the recent rise in inflation but believe it would begin to drop soon

In its life of a little over three years, the Reserve Bank of India’s monetary policy committee (MPC) is perhaps navigating through the toughest period. The distress is visible in the minutes of the last meeting, which shows that the six-member team was torn between concerns over growth and its fear of inflation.

In his first MPC meet, as deputy governor of RBI, Michael Patra was worried that the central bank has entered a tunnel of testing trade-offs and the light at the end of it won’t be seen for some time to come.

“Monetary policy has headroom to respond to the evolving macroeconomic configuration, but a good fix is needed on the shape of the inflation hump it has chosen to look through," said Patra.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

In short, MPC could have no clarity on how inflation would behave, considering that on most times in the past, it has taken the members by surprise.

Indeed, headline retail inflation rose to 7.35% in December, far higher than what RBI had anticipated in previous policy statements. In fact, the central bank had to raise its inflation forecast, and now expects the headline number to touch 6.5% in the current quarter. That means inflation is uncomfortably above RBI’s mandated target of 2-6%.

On growth though, members were clear that the economy needs both monetary and fiscal stimulus. Long-standing hawk Chetan Ghate took comfort from the fact that inflation expectations were lower and that softer core inflation could give RBI room to cut rates.

Member Ravindra Dholakia was, however, disappointed that the Union budget was not expansionary enough to support growth. He believes that the central bank should preserve space to provide some ballast later for growth.

Dholakia received support from an unlikely corner, that of Patra on monetary policy stimulus. Unlike in the past, when both members have disagreed, this time around the two believed that the central bank should be ready to cut rates at the first instance of headroom appearing.

Governor Shaktikanta Das added his weight to the growth-centric thought process of the other members. Noting that global shocks from the latest coronavirus outbreak have cast a pall over an already modest domestic growth outlook, Das indicated that rate cuts were not off the table. “Considering the overall evolving growth-inflation situation, it would be prudent to continue the focus on growth in the context of the expected moderation in inflation," he added.

Given that growth is down to 5%, MPC is willing to use whatever space is available for stimulus. All it needs is that inflation should drop closer to its mandated target.

The signs of this are already visible and some economists believe rate cuts could begin as early as April. If that happens, it would be a pleasant move for the sake of growth.

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