Fourth bi-monthly monetary policy: Frank, intense talks in MPC, but no rancour, says Urjit Patel

Lenders should find added impetus for better transmission of rates.

By: ENS Economic Bureau | Mumbai | Published: October 5, 2016 12:45:58 am
rbi, rbi rate cut, rbi repo rate, rbi policy review, rbi policy, urjit patel, rbi repo rate, rbi rate cut, business news, banking news RBI governor Urjit Patel (2nd from right) with deputy governors NS Vishwanathan, R Gandhi, S S Mundra and RBI Executive Director Michael Patra on Tuesday. (Express Photo: Nirmal Harindran)

Reserve Bank Governor Urjit Patel on Tuesday said his discussions with the members of the Monetary Policy Committee (MPC) on the new policy went on well, saying that it’s a great MPC and the “discussions were frank and intense but always friendly”.

In a little over 15-minute interaction with the media, his first after taking charge on September 4, Patel said, “we ensured that there’s no rancour and at the end of the day we agreed… we placed before the country. “

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Patel, who is considered a low-profile banker, said: “We have a great MPC. The three members of MPC are of outstanding pedigree. They all are well known academicians. They bring value and dispersion of opinions.”

In fact, it’s for the first time in the history of the RBI that a policy panel decided the interest rate policy. “I welcome the MPC members who will be a source of support to the RBI and the country, and will help enhance the process and quality of monetary policy making in the country,” he said.

The MPC held two meetings — October 3 and 4 — to decide on the interest rates after deliberating the key economic areas. “The discussions with the MPC were frank, intense but always friendly. In the end we went with the MPC resolution,” Patel said.

The six members of the MPC include three government-appointed economists (Chetan Ghate, Pami Dua and RH Dholakia), two senior RBI officials (Deputy Governor R Gandhi and Executive Director Michael Patra) and RBI Governor Urjit Patel.

According to Patel, the committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. “It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation — which holds the key to future inflation outcomes — rather than merely the statistical effects of a favourable base effect,” Patel said.

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, Patel said. “This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement.”

Patel was optimistic about transmission of rates. “The easy liquidity conditions engendered by the Reserve Bank’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,” he said.

The MPC took note of potential cost push pressures that may emerge, including the 7th Pay Commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices, he said. The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root. On balance, the MPC envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively, Patel said.

According to Patel, the momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award. “The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors,” he said.

The continuing sluggishness in world trade and smaller terms of trade gains than in the past point, however, will further slacken external demand going forward. “Accordingly, the projection of growth of real gross value added (GVA) for 2016-17 is retained at 7.6 per cent, with risks evenly balanced around it,” Patel said.

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