Neal Bhai Reports — Policy Panel Rate Cut Decision was Unanimous — Members of the Monetary Policy Committee (MPC) unanimously voted to bring down policy rate by 25 basis points on the belief that the government’s measures to ease supply and the excess capacity in the industry would reduce price pressures though there is an upside risk to inflation, the minutes of the meeting released on Tuesday shows.
Of the six members of the MPC, Reserve Bank of India Governor Urjit Patel, executive director Michael Patra, and Chetan Ghate appear to have concluded that this may be the time to reduce policy rates by a quarter point though inflation threats have not vanished yet. Almost all of them believe that the economy is in fine fettle.
“High frequency data embedded in our forward-looking surveys and daily movements in prices of fruits and vegetables, cereals and pulses across India gave us confidence that inflation target of 5% for Q4 of 2016-17 can be achieved,“ governor Patel said.
“Therefore, while our modelbased projections indicated upside risks to target, a calibrated policy judgement was warranted, given that some space for policy action had opened up with fall in inflation in the August reading.” On October 4, the RBI cut repo rate by a quarter point to 6.25% even as it forecast inflation above the 4% target which could move in a 2 percentage point range.
“All MPC members seemed to assess that upside risks to inflation are manageable through coordinated action with the government,“ said Saugata Bhattacharya, chief economist, Axis Bank. “This tilted growth-inflation tradeoff at this juncture in fa vour of a rate cut.“
Chetan Ghate, professor at the Indian Statistical Institute, was clear about the inflation risk, but justified his vote for a cut saying it is time to accept risk. “While I recognise that upside risks to meeting the objective of 5% CPI inflation by Q4 of 2016-17 remain, given the current juncture, these are acceptable risks,“ he said. “Expectations of future in flation at the monetary policy horizon, as evidenced by the survey of professional forecasters, are closer to the inflation target, which is expected to contribute to low and stable inflation.” Pami Dua of Delhi School of Economic relied on consumer confi dence than on inflation to vote for a cut. “While RBI’s Inflation Expectations Survey of Households suggests elevated inflation expectations, the Consumer Confidence Survey presents an encouraging outlook for the price situation as well as future economic conditions,” Dua said.
Patra, the RBI nominee on MPC, said inflation is yet to be tamed.“Inflation has been moving down in relation to the second and third bi-monthly statement projections,” he said. “This is not to say that the beast has been beaten or it’s back broken, but there is a turn in its momentum that is exploitable, especially by measures that hold down month-on-month changes in prices of food items.“
Deputy Governor Gandhi said, “From among the domestic sources of risks to inflation, I see the maximum comfort coming from pulses.” IIM Professor Ravindra Dholakia said: “The probability of inflation turning up from the current level is reasonably less.There are good chances for consumer inflation to soften substantially, benefiting from a good monsoon, supply management measures of the government and reforms gaining traction,” said Dholakia. But governor Patel remains cautious. “Inflation outcome in Q4 will have to be carefully and continuously monitored as upside risks, albeit lower now than before,” he said.
To enhance the richness of the minutes, MPC could consider publishing individual forecasts on CPI inflation, GDPGVA growth, and other important macro variables if possible,“ said Shubhada Rao, chief economist, Yes Bank. “This will provide a spectrum of continuity on each members assessment of the broader economy.“ — Gold Silver Reports
Policy Panel Rate Cut Decision was Unanimous