Five RBI monetary policy committee members voted for status quo: minutes

Mumbai: One monetary policy committee (MPC) member suggested a cut in the policy rate by 50 basis points citing reasons such as easing inflation expectations and low capacity utilization, according to the minutes of the panel’s last meeting, released on Wednesday. He was outvoted by the other five members who chose to leave the rate unchanged. However, the tone of the other members turned less hawkish as they indicated that they would prefer to wait and watch if inflation, which has eased below target, will stay the course.

One basis point is one-hundredth of a percentage point.

“The three months and 12-months advance inflationary expectations as per the central bank survey of households are unambiguously declining and are among the lowest levels observed in the history of such surveys,” wrote Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad, the MPC member who dissented. Dholakia differed with the Reserve Bank of India’s (RBI) forecast saying that core inflation figures vindicated his view about a clear declining trend. His forecasts were lower by up to 90 basis points than the RBI’s upper range forecast, he wrote.

He pointed out a range of factors supporting his call for a rate cut: Capacity utilization below 75%, the optimism for a second good year for agricultural production from the monsoon rain forecasts, a low likelihood of a rise in crude oil prices, the fact that the markets have already factored in rate hikes by the US Federal Reserve, the low chances of all states implementing the increase in housing rent allowance for government employees recommended by the Central Pay Commission, and the fall in inflation from the implementation of the goods and services tax (GST).

But this was a standalone view. At its 7 June meeting, the MPC kept the repo rate, at which RBI infuses liquidity into the banking system unchanged at 6.25%.

“Divergent views have begun to form now, which is a sign of maturity. If inflation continues to surprise, we will see more divergence,” said D.K. Joshi, chief economist at Crisil.

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According to Michael Patra, executive director of RBI, the focus should be on keeping inflation towards its medium-term target and not conducting monetary policy by looking at the past.

“In a situation in which transitory and structural factors are meshed and difficult to decouple, apparently divergent messages emanate from the few data points that are available at this stage,” wrote Patra. “Without more clarity, it is possible to make policy errors that can be large and costly in the medium term.”

In May, consumer price inflation reduced to 2.18% from 2.99% a month ago, well below the RBI’s medium target of 4%.

Other members broadly supported this wait-and-watch policy citing risks such as a rise in minimum support prices for crops and rising fiscal risks due to growing demand for farm loan waivers besides the implementation of pay panel recommendations.

RBI deputy governor Viral Acharya also questioned whether a rate cut would really help economic growth at a time of bank balance sheet stress.

“Tolerance for a slightly higher real rate of interest is justified to ensure weak banks do not find relatively low the hurdle rate for ever-greening (perennial extension) of bad loans. What is required for monetary policy to do its job better is to address the stress on bank (and highly-indebted borrower) balancesheets,” he wrote.