Monetary panel minutes signal a hawkish RBI in the offing

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SME Times News Bureau | 20 Apr, 2018
The RBI has signalled the prospect of a more hawkish stance on interest rates despite lowering its inflation forecast for the current year at its first monetary policy review of the fiscal earlier this month, according to the minutes of the central bank's latest Monetary Policy Committee (MPC) meeting here released on Thursday.

On April 5, the Reserve Bank of India (RBI) maintained the status quo on its repo, or short-term lending rate for commercial banks, at 6 per cent for the fourth bi-monthly review in succession, along with its 'neutral' stance.

The released minutes showed that RBI Deputy Governor Viral Acharya is likely to vote for "withdrawal of accommodation" when the MPC meets in June.

"Since the last MPC meeting, I have moved substantially closer to switching from the neutral stance to beginning the process of withdrawal of accommodation. This is in spite of the softening of inflation in recent prints," said Acharya as per the minutes.

"I view the (Inflation) risks as tilted significantly to the upside given the continuing rise in the ex-food-and-fuel inflation. Besides oil prices, my another primary concern is the risk of fiscal slippages, at both the Centre and state levels.

"It is important to let some more hard data come in, especially on growth, and allow some more time to let the early skirmishes on the global trade front play out," he said.

As per official data, retail inflation based on the consumer price index (CPI) eased marginally to 4.28 per cent in March, from 4.44 per cent in February, but remained outside the RBI's medium-term target of 4 per cent.

In a repeat of the previous policy review in February, five members of the MPC, including the three external ones and the Governor, voted in favour of the decision, while RBI Executive Director Michael Patra voted for an increase in the repo rate by 25 basis points.

The MPC statement after the meeting said the recent volatility in global crude prices has brought considerable uncertainty to the near-term inflation outlook.

"Does it present a persuasive case for an easier/neutral monetary policy stance? It is important to recognise that volatility in the prices of vegetables is obscuring a clearer evaluation of underlying inflation pressures," according to the assessment by Patra.

According to RBI Governor Urjit Patel, the inflation outlook faces several uncertainties emanating from the increase in minimum support prices for kharif crops, volatile crude oil prices, "the staggered impact of revision in HRA by various state governments, fiscal slippages by the Centre and the states and the performance of the monsoon".

"I would like to wait for more data and watch how various risks to inflation evolve, going forward. I, therefore, vote for holding the policy repo rate at the current level and maintaining the stance as neutral," Patel said.

External member Ravindra Dholakia also cited several uncertainties around the inflation forecast, as per the MPC minutes.

"There is hardly any evidence on employment growth picking up to a level that would put upward pressure on the wage growth.

"Fears of a trade war among major global players are turning increasingly realistic with likely adverse impact on our exports and costs of production. It may severely affect our growth recovery over the coming year," he said.