RBI monetary policy committee is united in worry but divided on the cure

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The rise in retail inflation and an uncertain recovery of economic growth are worries shared by all members of the monetary policy committee (MPC).

The overwhelming message from the minutes of the December meeting of the MPC was that the recent inflation rise has disturbed every member. Even the lone dove in the six-member MPC, Ravindra Dholakia, pared down his pitch for a rate cut to 25 basis points this time from around 40bps in the previous meeting.

Members were worried over the swift rise in retail inflation in October and the fact that it was more broad-based than the previous months added to their concern. So much so that Chetan Ghate observed that the conquest of Indian inflation is certainly not a done deal. Retail inflation had jumped to a seven-month high of 3.58% in October from 3.28% in September. The incessant rise in global crude oil prices and the resultant increase in domestic prices, the hike in minimum support prices for wheat, the expected upside from pay revision for government employees all added to a disturbing outlook for inflation, which each member noted.

Barring Dholakia, all members felt that inflation has the potential to stay above the target level and an expected pick-up in growth would only ensure this. The Reserve Bank of India (RBI) had increased its inflation forecast for the second time in December and now expects retail inflation to be 4.3-4.7% for the second half of the current fiscal year.

The members also shared the worry over growth as they observed that gross value added (GVA) for September quarter was slightly below forecast. Known hawk and RBI official Michael Patra stated that he is far from being sanguine on growth. Dholakia is of course the most worried and unlike other members believes the output gap is unlikely to close.

While the output gap continued to be the main feud among members particularly Dholakia and Patra, members also differed on what should RBI pay attention to—growth or inflation. Dholakia downplayed RBI’s forecasts on inflation and argued that the sagging investment warrants a rate cut. Deputy governor Viral Acharya prescribed better transmission of past policy rate cuts onto lending rates to revive investment instead of more rate cuts. Patra believed that reforms are the only way to reinvigorate investment and not monetary stimulus.

It is clear that MPC is united in its worry but divided in the cure. Perhaps another round of economic data would unite them about the cure too.