RBI MPC meet minutes: Common man seems to be experiencing inflationary pressure

Rising inflation hitting the common man and uncertainty in markets across the globe were the primary reasons behind the Reserve Bank of India decision to raise interest rates in its latest monetary policy review.

"There is no alternative to raising the policy rate by 25 bps so as to signal concern about underlying inflation, manage inflation expectations, and guard proactively against a further increase in inflation," RBI Deputy Governor Viral Acharya was quoted as saying in the minutes of the MPC meet that were released on Wednesday.

The deputy governor also said that it was only the uncertainty surrounding oil and food prices, and the way financial markets and trade wars between nations are playing out that led him to keep the stance neutral.

After a three-day meeting in Mumbai, all the six members of monetary policy committee (MPC), headed by RBI Governor Urjit Patel, voted for the key policy repo rate to be hiked by 25 basis points to 6.25 percent.

Apart from Patel and Acharya, the other MPC members are Chetan Ghate, Professor, Indian Statistical Institute; Pami Dua, Director, Delhi School of Economics; Ravindra Dholakia, former Professor, Indian Institute of Management, Ahmedabad; and Michael Patra, Executive Director, RBI.

Inflation risks

Like all the other members of the MPC, Patel observed that inflation risks have increased since the announcement of the last bi-monthly monetary policy review.

"A key risk to inflation cited in the MPC's April 2018 resolution has since materialized. Crude oil prices have risen sharply by over 12 percent even as there was some moderation in recent days. On the positive side, food inflation has continued to be benign," Patel said.

He added that two developments were particularly noteworthy from a price stability point of view --

• Inflation (CPI excluding house rent allowances-HRA) has averaged 4.4 percent since November 2017
• Inflation expectations of households

He said all these factors prove that economic activity is strong at the moment.

According to Ghate, an examination of both cost-push and demand-pull inflation numbers revealed that one year from now, inflation was likely to be over 4 percent. "This warrants a monetary policy response," he said.

With similar undertones, Patra, who had been the lone dissenter at the February and April MPC meetings by favouring a rate hike, said that the prolonged period of staying on hold is denting the credibility of the MPC's commitment to maintaining inflation at the centre of the target band of 4 percent (+/- 2 percent).

At its policy meet in June, the MPC also revised its inflation forecast to 4.8-4.9 percent for the first half of FY19 and to 4.7 percent for the second half, including the impact of higher house rent allowance for central government employees.

But Dholakia said there are chances that headline CPI prints in the coming months (H1 FY19) may turn out to be lower than expected.

"Although such possibilities are not ruled out, their chances are less. Under such circumstances, I believe that prudence lies in retaining the neutral policy stance, but increase the policy rate by 25 bps for now. Future course of action should depend on how the scenario on growth and inflation develops," he said.

Patel only hopes that a normal monsoon could mitigate risks to high inflation.