India’s monetary policy-makers disagreed sharply over whether the economy needed another dose of stimulus, underlining their dilemma as growth slowed with inflation forecast to accelerate.
While five on the six-member monetary policy committee voted to keep the key policy rate unchanged this month, one member said the Reserve Bank of India must be ready to tighten while another said 25 basis point cut for the month of August was too little and too late. Governor Urjit Patel, his deputy Viral Acharya, and Pami Dua said recent indicators have been volatile and more data is needed to ascertain the magnitude of risks, according to minutes of the October 3-4 meeting published Wednesday.
“The credibility of the MPC will be tested in the months ahead,” said Michael Patra.
Data released after the RBI’s decision showed inflation unexpectedly steadied at 3.3 per cent in September from a year earlier. The monetary authority had raised its inflation forecast to a range of 4.2 per cent to 4.6 per cent for October-March, higher than its 4 per cent medium-term target and the previous projection of 3.5 per cent to 4.5 per cent.
It also lowered the estimate for gross value added – a key measure of growth – to 6.6 per cent for the year through March 31, 2018, from 7.3 per cent, keeping alive speculation that it could cut rates later this year. Gross domestic product had slowed to a three-year low in the April-June quarter, slugged by the government’s cash ban and ahead of a new goods and services tax. The repurchase rate was left at a seven-year low of 6 per cent.
“The implementation of the GST has rendered prospects for the manufacturing sector uncertain in the short-term,” Patel said. “This may further delay the acceleration in investment activity. However, there is a need for more data to assess whether the recent headwinds in overall GDP growth prints are transient or sustained.”
Acharya said given the central bank’s inflation outlook ‘has risen quite some distance over the target of 4 per cent, there did not seem much room for monetary policy adjustment.’ Patra said the RBI should be ready to raise interest rates if inflation breaches 4 per cent.
“The minutes revealed an intense debate on the growth and inflation outlook and appropriate policy response – but did not suggest a bias towards easing,” Morgan Stanley economists including Derrick Kam wrote in a report.
There was one MPC member who called for a steep cut. Arch-dove Ravindra Dholakia argued that there was enough slack in the economy and inflation would rise only marginally, leaving enough room for more cuts.
“In my view, the policy rate should have been cut by 50 basis points long back in June 2017,” Dholakia said. “A cut of 25 basis points in August was too small and too late.”
The minutes were published after the market was shut on Wednesday and the foreign-exchange and bond markets will be closed Thursday and Friday for local holidays. The yield on benchmark 10-year government debt has risen 10 basis points this month.