Monetary Policy Committee meeting: Five out of six MPC members opted for status quo on rates

Ravindra H Dholakia, one of the three external members of the Monetary Policy Committee (MPC), was the lone dissenter, voting to lower the key repo rate by 25 basis points arguing that inflation had eased enough to justify a rate cut in the policy review on October 4.

The RBI, in its latest monetary policy review had kept policy rates unchanged and had marginally upped the inflation outlook to 4.2-4.6 per cent for the second half (October-March) of the financial year. The central bank also cut its economic growth projection based on gross value added (GVA) to 6.7 per cent for 2017-18 from 7.3 per cent estimated earlier citing the sluggish growth in food grains production, adverse impact of implementation of the GST on the industries and weak consumer confidence.

“In my view, the policy rate should have been cut by 50 bps long back in June 2017. A cut of 25 bps in August was too small and too late. We can still make the additional cut of 25 bps now if we want to be extremely cautious. Otherwise, my opinion is that we have a space for a cut of about 40 bps at present with due consideration to any possible upward risk to future inflation,” said Dholakia.

According to the data released by the Central Statistics Office (CSO) earlier this month, retail inflation was unchanged at 3.28 per cent in September from its revised figure for August. The provisional retail inflation for August was 3.36 per cent.

Michael Patra, an executive director of the RBI, was the most hawkish among the six panellists and called for readiness to even raise rates if needed.

“I, therefore, vote for status quo, but only as long as inflation readings stay within the target of 4 per cent. It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further,” said Patra.

Reserve Bank of India Deputy Governor Viral Acharya said the central bank is committed to improving the transmission of monetary policy.

“I believe there is still some scope left for transmission of past monetary policy accommodation to existing loan portfolio that is tied to the base rate. Our Study Group on the MCLR (marginal cost based lending rates) has proposed what I find a reasonable path going forward in referencing floating rate loans to simple market benchmarks that will improve transparency for borrowers and competitiveness in lending,” said Acharya.

RBI Governor Urjit Patel said that there is a need for more data to assess whether the recent headwinds in overall GDP growth prints are transient or sustained.

“For keeping headline inflation close to 4 per cent on a durable basis, it is important to recognise near and medium-term risks to the inflation outlook. We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach,” said Patel.