What made an inflation-worried monetary policy committee (MPC) turn into a growth benefactor in under two months?

The minutes of the Reserve Bank of India’s (RBI’s) latest MPC meeting shows that the collapse of food inflation was not the only reason. Recall that the rate cut decision got four votes, with two dissenting voices, at the meeting earlier this month. A big surprise was that long-standing hawk Michael Patra voted for a cut.

All members agreed that food inflation will remain benign for the next 12 months, even though they expected prices of vegetables to bounce back, showed the MPC minutes. But what spooked everyone was the threat of a global growth slowdown, and the probability of it adversely affecting the Indian economy, through the trade and investment channel.

There has been at least one dissenting vote in nine of the last 11 RBI MPC meetings.
There has been at least one dissenting vote in nine of the last 11 RBI MPC meetings.

In fact, Patra, who heads the monetary policy department at the central bank, termed these risks as dark clouds and suggested the need to insulate the economy through a policy response. Recall that growth concerns hardly featured in his comments in the previous meetings when global trade tensions had already gathered steam.

Patra has support from RBI governor Shaktikanta Das and members Ravindra Dholakia and Pami Dua as well. Dholakia expects there will be room for deeper cuts in the coming months.

Interestingly, even deputy governor Viral Acharya, who dissented on the rate cut, said it was “time to take the helmet off", given the benign inflation outlook.

But Acharya also wanted to “stay within the crease", while other members including Das were for a bolder move.

Acharya warned the very depressed food inflation that is making the central bank relook at its policy response is also triggering an agrarian crisis. The crisis would attract a political response, which may eventually drive up prices. In other words, large doles or even farm loan waivers were possible, which could put upward pressure on inflation.

Acharya also warned that core inflation continues to be elevated, which is a threat. The spikes in education and healthcare inflation were uncomfortable and the core’s historic behaviour of being sticky was making it difficult for the central bank to ignore. Chetan Ghate, the other dissenter, said he is worried India is not consolidating fiscally.

Governor Das, in his maiden meeting, was clearly for growth-friendly policy responses, which isn’t surprising. He expressed the worry that credit to industry is anaemic, and stressed on the need to spur private consumption.

Coming back to Patra, whose stance surprised one and all, he preferred to “boost the domestic economy in an opportune manner rather than deplete it in haste", given the risks from a global slowdown.

This time around, Patra also seems convinced that headline retail inflation won’t go beyond 4% for the next fiscal year. Ergo, it is alright for RBI to cut the policy rate, especially when such an action is unlikely to fire up inflation.

The MPC minutes show that members agreed how inflation will move in the coming months and even on growth prospects. But two of them wanted to refrain from taking the leap, while the rest preferred to step out in faith. The coming months will show which stance was right.

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