MPC minutes: Risks to inflation, fiscal uncertainty to keep RBI alert, says Patel

Risks to inflation due to the rise in oil prices, uncertainties on the fiscal and external front will keep the central bank vigilant, said the Reserve Bank of India (RBI) Governor Urjit Patel in the minutes of the fifth bi-monthly and 7th meeting of the Monetary Policy Committee (MPC).

The MPC met on December 5 and 6 to announce status quo in the key policy repo rate at 6 percent.

Of the six members of MPC, only one member - Ravindra H Dholakia, a government nominee - voted for a policy rate reduction of 25 basis points (bps).

Other members -- Chetan Ghate, Pami Dua, Michael Debabrata Patra, Viral V. Acharya and Urjit R Patel were in favour of the monetary policy decision.

Urjit Patel

Patel, who heads the committee, said, "The macroeconomic situation has remained broadly unchanged since the last MPC meeting in October 2017. However, the recent upturn in crude oil prices has emerged as a source of concern."

“Several uncertainties, especially on the fiscal and external fronts, persist. It is, therefore, important to be vigilant. Hence, I vote for status quo,” he said.

Patel pointed out “several risks to the projected inflation trajectory” – 1. Inflation expectations of households for both three-month ahead and one-year ahead periods in the latest round of the Reserve Bank’s survey moved up, 2. Rising input cost pressures for both manufacturing and services raising risks of pass-through on output prices and 3. Fiscal slippage concerns still linger on.

Ravindra Dholakia

Dholakia, the lone dissenter, did not agree with the RBI’s assessment for both the CPI inflation and the economic growth prospects in the near-term.

“I also do not share its over-concerns for the upside risks on inflation and over-optimism on economic growth front. In my opinion, the inflation situation is under reasonable control and is likely to remain well within the acceptable range during the foreseeable future because after a couple of months favourable base effects will set in,” he said.

According to him, the real cause of concern right now is the economic recovery and its slow pace.

He further said, “Fiscal space is more or less exhausted but the space for the monetary boost has fortunately been available now for a relatively long period. Had the policy rate been cut to 5.75 percent in June 2017 as I had argued then, the economic recovery would have been far more rapid and we would have been in a much better position.”

Michael Patra

As per RBI Executive Director, Patra, the investment temper remains dormant. “It awaits reforms that bite the bullet in terms of freeing up product and factor markets, removing barriers to entry and exit, and rekindling productivity and competitiveness all around. As growth regains solid ground, it could likely sustain inflation above the target.”

Hinting at a rate hike, Patra added that the time has come for monetary policy to take guard and be ready to go on to the front foot.

Viral Acharya

As per Viral Acharya, Deputy Governor of RBI, the incoming data – Goods and Services Tax (GST), gross value added (GVA), commodity prices -- will be key to shape the policy going forward.

“In parallel, the Reserve Bank is examining options to improve the transmission of its policy rate actions from banks to borrowers,” Acharya said.

The next meeting of the MPC is scheduled on February 6 and 7, 2018.