Corporates’ plight led to MPC’s unanimity

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Poor pricing power of the companies and the comfort that the good monsoon would cool prices seemed to have swayed the scales in the favour of a 0.25% cut in the rate at which the Reserve Bank of India (RBI) lends money to banks (also called repo rate).

On October 4, the Monetary Policy Committee (MPC) was unanimous in its decision to snip the repo rate to kick-start growth in the Indian economy. The minutes of the meeting released on Tuesday reveal that the MPC members unanimously decided to cut rates to bolster growth in Asia’s third-largest economy drawing comfort from the expectation of fall in food prices and the excess capacities throttling the companies’ ability to hike the prices their goods.

Urjit Patel, governor, RBI, was confident of meeting inflation target of 5% for the fourth quarter of 2016-17. His confidence emanated from the daily movements in prices of fruits and vegetables, cereals and even pulses across the country. MPC members were unanimous in their concern over the excess capacity and the poor corporate pricing power.

Outside members on the committee like Chetan Ghate, the associate professor of Planning Unit at Indian Statistical Institute Delhi relied on the good monsoon, a decline in food inflation and better food supply management by the government to meet the inflation targets, while adding a word of caution on the upside risks to inflation.

The survey of the professional forecasters also gave comfort to the members to ease rates to usher in a softer interest regime. Ghate believed that on the growth front there are signs of revival of economic activity, which needs to be nurtured.”

R Gandhi, deputy governor, RBI, relied more on the effective supply management measures by the Government and also a normal monsoon to keep food prices under check. He said, “I expect the food inflation to stay even more firmly contained. Given the high weight of food in the Consumer price index (CPI) basket, supply response and supply management will remain critically important to influence the space for monetary policy actions.”

Not everyone believed the back of inflation was broken. Michael Patra, executive director, RBI, said it is not as if the inflation beast has been beaten or its back broken but said there is softening bias that needs to be exploited. Patra said, “Moreover, the reduction in inflation in August is more real than statistical – a collapse in momentum which allowed the play of base effects”

Under-utilisation of capacity was a concern to Ravindra Dholakia, faculty at IIM-Ahmedabad. He added, “I do not see major risk to inflation if the output gap closes fast. The above assessment gives me the comfort to vote in favour of a cut in the repo rate by 25 basis points.”

Pami Dua, director at Delhi School of Economics, drew comfort from the professional forecasters’ survey which believed that inflation expectations can be anchored. Dua said, RBI’s Industrial Outlook Survey suggests some increase in input price pressures in the manufacturing sector in the short-run, this is not expected to transmit to higher selling prices.