The Monetary Policy Committee of the Reserve Bank of India (RBI), which kept the policy repo rate unchanged in its February 7 policy review expressed concern about continued inflationary risks, citing factors including high food and global crude oil prices and the government’s decision to increase spending for the year starting in April to support a struggling agricultural sector. The MPC voted 5-1 at the meeting to keep the policy rate on hold at 6 per cent and to retain its “neutral” monetary policy stance. RBI Executive Director Michael Patra was the sole member to vote for a 25 basis point hike. The minutes released on Wednesday showed widespread concerns among the six MPC members about inflation, which accelerated to a 17-month high of 5.21 per cent in December from a year earlier, driven higher by food and energy. “Although inflation risks have increased in recent months, incoming data should provide greater clarity about the persistence of inflationary pressures. The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture. I, therefore, vote for keeping the policy repo rate on hold while maintaining a neutral stance,” RBI Governor Urjit Patel said. “Looking forward, inflation in the baseline scenario is projected to remain above the target of 4 per cent throughout 2018-19. There are several upside risks to inflation, especially from the staggered impact of HRA increases by various state governments (the direct effect on the CPI of the pure statistical adjustment has to be looked through, but not the second round effects driven by, say, expectations); policy for arriving at the minimum support prices for kharif crops; and the fiscal slippage as indicated in the Union Budget, which also has attendant ‘crowding-out’ implications with regard to the cost of private domestic credit. The evolving global macro backdrop is a concern,” Patel said. According to Patra, the output gap is starting to turn up from a persistently negative state. If the professional forecasters’ consensus around 7 per cent plus growth for 2018-19 materialises, the output gap is expected to close going forward. “If the statistical reversal of the HRA effect is looked through, the real policy rate is below 1 per cent and could fall further absent policy action. This is completely misaligned with underlying fundamentals and the economy’s prospects at a time when activity is picking up. In view of the prolonged period of status quo, a series of rate increases may be warranted to remove excessive accommodation. The time to begin is upon us. I vote for an increase of 25 basis points in the policy rate to commence the withdrawal of accommodation,” Patra said. RBI Deputy Governor Viral Acharya said the next few months of inflation and growth data will be key to determining the evolution of policy rates. If growth remains robust and inflation prints continue to project headline inflation a year ahead well above the target, then a change in stance from “neutral” to “withdrawal of accommodation” might have to be considered. “In the meantime, it would be good to focus on pushing forward the work we have undertaken in improving the transmission of policy rate changes to the real sector taking the resolution framework for stressed assets to its logical conclusion,” Acharya said. Ravindra H Dholakia, Member, MPC, said developments on inflation and growth fronts since the last meeting of MPC in December 2017 have been more or less on expected lines. “Although the headline inflation was expected to rise in November and December 2017, the extent of increase was higher than I expected. However, it is likely to decline during the next 3-4 months on account of favourable base effect and seasonal factors. The expectation about recovery in the growth of GVA remained subdued in the Economic Survey 2017-18 in line with what I had anticipated in my statement in the last meeting of MPC,” he said.
