Moneycontrol News All six Monetary Policy Committee (MPC) members voted in favour of the February 8 annoucement to pause the key policy rate, according to minutes of the meeting released by the Reserve Bank of India on Wednesday.
In its sixth bi-monthly monetary policy for 2016-17, the MPC had kept repo rate unchanged at 6.25 percent.
While three members highlighted the need to change the stance from accommodative to neutral, four mentioned that inflation excluding food and fuel remains “sticky” at close to 5 percent. The government and RBI have targeted an inflation of 4 percent (+ / - 2 percent) till 2021.
RBI Governor Urjit Patel said that the short-run assessment of evolving macroeconomic conditions remains clouded. He mentioned the firming up of crude oil and commodity prices (including for food) potentially raising risks to the headline inflation.
“Domestic industrial input and farm costs, including rural wages, have increased in recent months. Inter alia cost push effects of 7th pay commission allowances, and exchange rate volatility arising from possible shifts in risk premia on a full rollout of US macroeconomic policies impart uncertainty to the inflation trajectory going ahead,” Patel’s statement said.
Chaired by Urjit Patel, the meeting held on February 7 and 8 was attended by all six members - Dr. Chetan Ghate, Professor, Indian Statistical Institute; Dr. Pami Dua, Director, Delhi School of Economics; and Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad; Dr. Michael Debabrata Patra, Executive Director at RBI and the newly appointed Dr. Viral Acharya, RBI Deputy Governor in charge of monetary policy.
According to Patel, “It is necessary to adopt a calibrated approach so as to minimise the collateral costs of achieving the target as well as ensure its durability. By shifting the stance of monetary policy from accommodative to neutral, there will now be sufficient flexibility to move the policy rate in either direction, depending on future data outcomes and projections, to help ensure that inflation is brought closer to 4 percent.”
Government nominee Dholakia said, “As the transitory impact of demonetisation recedes and remonetisation sets in, the banks’ MCLRs are likely to increase marginally. Moreover, under the current global environment, the real neutral rate of interest in India seems to be higher than the one for most of the developed countries. However, their future policy direction indicates rapid strengthening of the rates.
MCLR is the marginal cost based lending rate which determines the bank loan rates for new borrowers. Since January 2015, RBI has reduced repo rate by 175 basis points (bps) while banks have reduced MCLR in the range of 165-200 bps. However, the base rates (applicable to borrowers before April 2016) have been reduced by 85-90 bps.
1 basis point (bp) is a hundredth of a percentage point.
Viral Acharya said, “Such a time, while difficult for interest-rate setting, appears right for pushing forward on structural reforms of the banking sector: its asset quality and resolution, and its recapitalisation needs - both factors that have stunted credit growth at banks; and, the normalisation of administered small savings rates that have prevented a seamless transmission of monetary policy to bank funding and lending rates.”
This was the third meeting of the Monetary Policy Committee (MPC) after its formation. The next meeting of the MPC is scheduled on April 5 and 6, 2017.
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