The Monetary Policy Committee of the Reserve Bank of India (RBI) cited upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its repo rate unchanged, according to minutes of its April meeting released Thursday. However, Michael Patra, RBI executive director and an MPC member, favoured an increase in the repo rate by 25 basis points as a pre-emptive move to curb inflation pressures, but finally went along with others in the six-member committee in keeping it steady at 6.25 per cent.
MPC, however, raised the reverse repo rate, which is used to drain excess funds from banks, in its meeting on April 6.
“I believe that a pre-emptive 25 bps hike in the policy rate now will point us better at the target of 4 per cent to which the committee has committed explicitly. It will also obviate the need for back-loaded policy action later when inflation is unacceptably high and entrenched,” Patra said. “On balance, however, I vote for holding the policy rate unchanged in this bi-monthly meeting and await a few more readings of incoming data so that remaining transitory factors have passed and a clearer assessment of domestic and global macroeconomic conditions emerges,” he said as per the minutes.
“Notwithstanding likely favourable base-effects in the next few months, the outlook for inflation calls for close vigilance with a view to ensuring that the medium term inflation trajectory evolves in line with the objective of bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner. Therefore, I vote for maintaining the status quo in both the policy repo rate, and the stance,” RBI Governor Urjit Patel said.
According to Patel, given the volatility in the CPI, it is not easy to read its evolution. The outlook for inflation faces several other risks. Input costs have been rising, which could be passed on to output prices as demand strengthens. Further, the implementation of the HRA allowances recommended as part of the 7th CPC and the GST are risks, which could alter the inflation outturn in 2017-18. Uncertainty about the crude oil price trajectory is both ways given recent movements, he said.
RBI Deputy Governor Viral Acharya said headline inflation is set to rebound from its recent lows due to the expected (and in the past month, realised) mean-reversion in food inflation, especially in vegetables. “Global inflationary trends have remained on the upside too. There is some uncertainty as to when the headline inflation might cross the target inflation rate of 4 per cent and keep inching above, given that inflation without food and fuel is stubbornly above the target rate,” Acharya said.
“True to projections made at the time of the last meeting…, inflation is turning up. It seems to me that it is coming out of the U-shaped compression imposed by demonetisation and is now positioned on the rising slope. Several factors merit pre-emptive concern,” Patra said. “First, just as it drove a disinflation that started in August — well before demonetisation, which is responsible only for the sub-4 per cent trough — it is food that has pushed up headline inflation in February. And it is not the usual suspect — vegetables. It is the more sinister elements — protein-rich items other than pulses, cereals and sugar. When inflation rears its ugly head in these items, experience suggests it is likely to stay,” Patra said.
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