Inflation Can Accelerate, Warns RBI's Monetary Policy Panel

Four members of the MPC, including RBI Governor Urjit Patel, voted for a 25 bps rate cut in August 2 policy meet.

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Inflation Can Accelerate, Warns RBI's Monetary Policy Panel

One of the MPC members had voted for a 50 bps rate cut, showed minutes of last meet.

Mumbai: The Reserve Bank of India's monetary policy committee (MPC) members said easing consumer inflation had supported the need for a rate cut at its August meeting, but warned prices could start accelerating, minutes showed on Wednesday.

The comments reflected continued caution by most of the six-members of the committee, despite pressure by government officials and some economists to cut rates more aggressively after consumer inflation has remained below the RBI's 4 per cent target since October.

The RBI cut the main policy rate by 25 basis points to a more than 6-1/2 year low of 6.00 per cent on August 2, but kept its policy stance at "neutral".

Four MPC members, including Governor Urjit Patel, voted for the move, while one voted for a 50 bps cut. The remaining member, RBI executive director Michael Patra, voted to hold rates at 6.25 per cent.
The MPC members warned inflation could start accelerating later this year, while noting the focus should be on ensuring banks cut their lending rates further: despite the RBI rate cut, none of the major lenders have lowered the cost of loans.

"While the transmission has improved, there is still some space for banks to cut their lending rates," Patel wrote.

"Resolution of stressed balance sheets of banks, therefore, will remain important for reviving credit demand and the investment cycle."

Proponents of more easing have argued real interest rates are too high, and that India needs to boost an economy that grew 6.1 per cent in January-March from a year earlier, fast by global standards but the slowest pace in over two years.

The RBI has been much more cautious, however, having changed its stance to "neutral" from "accommodative" in February, and warning repeatedly inflation could start accelerating, including through a recovery in food prices and planned pay increases for government employees.

Those views appeared to get some support after data on Monday showed annual consumer price inflation picking up to 2.36 per cent in July, from a more than five-year low of 1.87 per cent in the previous month, as a decline in food prices abated.

The majority of MPC members stuck to its warnings on inflation, the minutes showed, including by expressing worries about higher government spending after some state governments bailed out farmers defaulting on their loans.

Deputy Governor Viral Acharya wrote the RBI's 12-month projection was for headline inflation to move above 4 per cent, even without factoring in the increased housing allowance to government employees.
But Ravindra H. Dholakia, a professor, voted for a 50 bps cut for a second meeting in a row, saying inflation would run below RBI expectations and noting the economy needed stimulus.

"The neutral policy stance needs to be seriously reconsidered in favour of the accommodative stance," he said.

 
© Thomson Reuters 2017


(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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