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Home / News / India /  India’s 1st rate-setting panel bows out amid inflation worries

The Reserve Bank of India’s first Monetary Policy Committee completed its four-year term with a mixed record.

While the six-member panel managed to keep inflation within the 2% to 6% target band for most of that time, it ends the period with consumer-price growth well above that range.

The MPC held its last policy meeting under its current term on Aug. 4-6, and the minutes published Thursday showed members fret over a recent surge in consumer inflation, preferring to wait for price pressures to wane before considering more steps to address the “deepest contraction in history." The panel is expected to be replaced with three new external members by the next meeting scheduled in late September. They will probably face a revised RBI inflation targeting framework, with changes expected to be introduced sometime next year.

Graphic: Bloomberg
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Graphic: Bloomberg

Key quotes from panel members

“Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously," Governor Shaktikanta Das was cited as saying

“The MPC has already signaled its concern in its stance by resolving to ensure that inflation remains within the target going forward," said Michael Debabrata Patra, a deputy governor at RBI

“Policy needs to be mindful of the space that may be needed to deal with possibility of increased stress that may resurface later with loan defaults and recognition of bad loans. Impact of fiscal actions and space also need to be closely observed for demand management," said Mridul Saggar, an executive director at the RBI

The outgoing members Ravindra Dholakia, Chetan Ghate and Pami Dua all voted to keep interest rates unchanged. Dholakia added there was a need for a pause to allow monetary transmission to take place while Ghate hoped that the future MPC would not go soft on inflation

If inflation exceeds the upper limit of the target band for three consecutive quarters, the RBI Act requires Governor Das to write a letter to the government to explain why the MPC failed to meet its goal. Average inflation in each of the first two quarters has already exceeded 6% and will likely remain elevated after consumer prices grew 6.93% in July, driven by higher food prices.

Propotionate response

Patra, who heads the monetary policy wing at the central bank, said if inflation persists above the upper tolerance band for one more quarter, policy makers will be constrained by the mandate to undertake remedial action, including an immediate and more than proportionate response to damp inflation pressures.

“The question is: can the economy withstand it in this virus ravaged, debilitated state?" Patra said. “The MPC has already signaled its concern in its stance by resolving to ensure that inflation remains within the target"

The MPC held its first meeting in October 2016 under then-Governor Urjit Patel. Out of 24 policy decisions since then, 13 have been to keep rates steady, including August’s vote to stand pat. The committee has cut the benchmark rate nine times during its four-year term and only increased it on two occasions.

At the MPC’s first meeting under Patel, the benchmark repurchase rate was at 6.5% and inflation stood at 4.4%. The policy rate is now 4%, with the bulk of the easing coming under Das, who succeeded Patel in December 2018. Under Das, the MPC has also abandoned its “calibrated tightening" policy stance for an easing bias.

The three external members who exited the MPC are Dholakia, considered to be dovish on policy, Ghate, who tended to be hawkish, and Dua, who struck a middle-path at most meetings and voted with the majority.


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