RBI Monetary Policy: Did an 'owlish' RBI present a hawkish policy?

Beena ParmarMoneycontrol Bureau

Reserve Bank of India Governor Urjit Patel, known for calling RBI an “owl”, may have turned hawkish on its monetary policy stance towards the year end.

The bird analogy is an economist jargon given to central banks for being dove-like or hawk-like with respect to their softer and harder interest rate stance, respectively.

However, it was in response to a question raised in January 2014 whether the RBI is hawkish or dovish, that Patel, the then Deputy Governor of the central bank, said, “We are neither hawks, nor doves. We are owls. The owl is traditionally a symbol of wisdom. We are vigilant when others are resting. Don't try and put us into buckets. We are doing what is necessary for the economy.”

On Wednesday, a clear shift from an ‘accommodative’ to a ‘neutral’ policy stance was seen by the monetary policy committee (MPC) headed by Patel.

The MPC maintained a status quo on key policy repo rate at 6.25 percent to “assess how the transitory effects of demonetisation on inflation and the output gap play out”.

Repo rate is the rate at which RBI lends to banks. The shift to a neutral stance will give more flexibility to the RBI, Patel told reporters at the post-policy press conference.

All six members of MPC voted in favour of holding rates, the third unanimous decision in a row. The accommodative policy stance had begun in January 2015 when the rate easing cycle started.

The policy, being Patel and the MPC panel’s third policy announcement, saw a not entirely surprising pause citing consonance with the objective of achieving consumer price index (CPI) inflation at 5 percent by Q4 of 2016-17 (January to March) and the medium-term target of 4 percent within a band of +/- 2 percent.

Signaling that the RBI may not be cutting interest rates anytime soon, the owl-like RBI shifted the monetary stance into hawk-like.

CPI fell to 3.41 percent in December compared to 3.63 percent in November. The headline inflation number has been pushed down in recent months due to the fall in prices of perishable items following demonetisation.

While retail inflation is well below the RBI’s March 2017 target of 5 percent, core inflation excluding food and fuel, has been unyielding at 4.9 percent since September.

RBI said, “Looking beyond, prices of pulses are likely to remain soft with comfortable supply conditions, while vegetable prices may potentially rebound as the effects of demonetisation wear off. The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects.

“Nevertheless, headline CPI inflation in Q4 of 2016-17 is likely to be below 5 percent. Favourable base effects and lagged effects of demand compression may mute headline inflation in Q1 of 2017-18. Thereafter, it is expected to pick up momentum, especially as growth picks up and the output gap narrows,” it added. 

Moreover, with base effects reversing during Q3 and Q4 of next year, inflation is projected in the range of 4 to 4.5 percent in the first half of the financial year and between 4.5 to 5 percent in the second half with risks evenly balanced around this projected path.

The MPC has also brought down its growth forecast for the current year to 6.9 percent from 7.1 percent earlier.

It, however, expects a sharp rebound in the next fiscal with growth being projected at 7.4 percent going by the Union Budget’s capital expenditure plan and boost to the rural economy and affordable housing contributing to the growth, again balancing the risks.