Ravindra H Dholakia, one of three non-Reserve Bank of India members of the Monetary Policy Committee (MPC), was the lone dissenter, voting to lower the key repo rate by 50 basis points by arguing that inflation had eased enough to justify a rate cut in the policy review on June 7. The vote marked the first non-unanimous decision in the five meetings since the MPC was formed in September 2016.
According to minutes from its last meeting released on Wednesday, the rest of the panel members, including Governor Urjit Patel and Deputy Governor Viral Acharya, wanted more evidence that inflation would ease, while expressing concern that consumer prices would accelerate later this year. Data after the RBI’s June 7 policy meeting showed inflation easing further to 2.18 per cent in May from a year earlier, the lowest in at least five years. Despite consumer inflation easing to 2.99 per cent in April, below its 4 per cent target, the RBI voted 5-1 to keep the repo rate at 6.25 per cent on June 7.
“Given the change in the outlook and assessment of the inflation and output over time, any theoretical rule-based policy for flexible inflation targeting would not only justify but also necessitate at least 50 basis point cut in the policy rate. This is because, if we are consistent, we must consider changes in the values of the critical parameters during the period since the last meeting of the MPC,” Dholakia said in his statement to the MPC.
Arguing that Repo rate can be cut by more than 50 bps, Dholakia said, “if we consider more realistic estimates of the sacrifice ratio for India, the policy rate cut could be even higher. Even under the most conservative estimates of the multipliers indicating the assumed sacrifice ratio, a minimum of 50 basis point cut in the policy rate is suggested.”