The Reserve Bank of India’s Monetary Policy Committee (MPC) considered the subdued outlook on the economic front and the decline in inflation while unanimously agreeing to cut the key policy rate by 25 basis points at its last policy review on October 4.
The minutes of the two day meeting on October 3-4, which was released on Tuesday, revealed all the six members of the committee envisaged a “trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017.”
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All the six members voted for a 25 basis points cut in the Repo rate. It is mandatory now to publish minutes of the committee’s deliberations within 14 days of the monetary policy review including the voting pattern.
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According to the minutes, RBI Governor Urjit Patel said indicators of economic activity pointed to a subdued outlook, though it was gradually improving.
“Further, continuing low capacity utilisation in industry and the persistence of the output gap suggested that pricing power is likely to remain low. Importantly, high frequency data embedded in our forward-looking surveys as well as daily movements in prices of fruits and vegetables, cereals and even pulses across the country gave us some confidence that the inflation target of 5 per cent for Q4 of 2016-17 can be achieved,” Patel said in his statement.
The minutes of the meeting said that the government has announced several measures to cool food inflation pressures, especially with regard to pulses.
“These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement,” it said.
According to external member Chetan Ghate the persistence of core inflation remains a concern.
“While I recognise that upside risks to meeting the objective of 5 per cent CPI inflation by Q4 of 2016-17 remain, given the current juncture, these are acceptable risks,” Ghate said.
“While RBI’s Inflation Expectations Survey of Households suggests elevated inflation expectations, the Consumer Confidence Survey presents an encouraging outlook for the price situation as well as future economic conditions,” said external member Pami Dua.
“The easy liquidity conditions engendered by RBI’s operations should also enable the smooth transmission of the policy action through various market segments. Furthermore, banks should find added impetus for better transmission by the recent downward adjustment in small savings rates,” the minutes said.
On the domestic front, the outlook for agricultural activity has brightened, the committee said. “The south west monsoon ended the season with a cumulative deficit of only 3 per cent below the long period average, with 85 per cent of the country’s geographical area having received normal to excess precipitation,” it said.
Accordingly, the first advance estimates of kharif production for 2016-17 by the Ministry of Agriculture have been placed at a record level.
“The industrial sector, by contrast, suffered a manufacturing-driven contraction in early Q2, after a sequential deceleration in gross value added in Q1. Even after trimming the statistical effects of the lumpy and order-driven contraction of insulated rubber cables, industrial production as measured by the IIP turned out to be slower than a year ago,” it said.