RBI Chief Went With Majority View On Status Quo In August Meet


Mumbai: The Reserve Bank of India’s outgoing governor Raghuram Rajan in his last monetary policy review on August 9 sided with four of the five members of the Technical Advisory Committee that recommended leaving interest rates on hold, citing sticky inflationary tendency.

“These members were of the view that CPI (Consumer Price Index) and CPI-food inflation have seen a recent uptick and certain other price indicators continue to be sticky,” according to the RBI’s updates on Minutes of Meeting of the TAC released on Wednesday.

In the third bi-monthly monetary policy of the fiscal year on August 9, members found headline consumer price index (CPI) inflation to be sticky with a tendency to increase.

The TAC members maintained status quo reasoning elevated food inflation has second round effects on headline inflation if it is persistently above double digits.

One member noted that while food inflation increased over past couple of months, largely driven by pulses and vegetables, it seemed to be ring-fenced, and could not be generalised.

Although industrial growth remains weak, the improvement in liquidity conditions should help banks pass through past policy rate cuts, they said.

They also opined that implementation of the goods and services tax (GST) poses an upside risk to inflation.

However, they said, “Inflation excluding food and fuel shows some signs of the anchoring of inflation expectations that needs to be further strengthened by keeping the policy rates unchanged.”

The real policy rate continues to be below the natural rate and there is no space for accommodation unless there is substantially lower inflation relative to the target of 5 per cent for March 2017 on a durable basis, they said.

One member recommended a 0.5 per cent cut in repo rate by saying there was high probability of inflation softening to 4-5 per cent by year-end.

There were also concerns on cost-push shocks in the form of a steady rise in crude prices.

Among others, the members also discussed the lacklusture global economic scenario.

Overall private investment demand continues to be lacklustre for a variety of reasons, and public investment accounts for a small share of total gross fixed capital formation in the economy, as per the TAC minutes.

“On the positive side, although global conditions continue to be fragile, stabilising commodity prices may be contributing to the uptick in India’s exports,” it added.

The five external members Shankar Acharya, Arvind Virmani, Errol D’Souza, Ashima Goyal, and Chetan Ghate sent their feedback through e-mail.

Since February 2011, the RBI is in practice of placing the main points of the TAC outcome on the monetary policy in the public domain with a lag of about one month after the meeting.

The consultation with external members of the TAC was held electronically during July 27 to August 1, 2016.