RBI policy panel turns less hawkish

MUMBAI: One monetary policy committee (MPC) member suggested a cut in the policy rate by 50 basis points citing reasons such as easing inflation expectations and low capacity utilisation, according to the minutes of the panel’s last meeting, released on Wednesday. He was outvoted by other five members who chose to leave the rate unchanged.

RBI policy panel turns less hawkish

However, the tone of the other members turned less hawkish as they indicated that they would prefer to wait and watch if inflation, which has eased below target, will stay the course. One basis point is one-hundredth of a percentage point.

“The three months and 12-months advance inflationary expectations as per the central bank survey of households are unambiguously declining and are among the lowest levels observed in the history of such surveys,” wrote Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad, the MPC member who dissented.

Dholakia differed with the Reserve Bank of India’s (RBI) forecast saying that core inflation figures vindicated his view about a clear declining trend. His forecasts were lower by up to 90 basis points than the RBI’s upper range forecast, he wrote.

He pointed out a range of factors supporting his call for a rate cut: Capacity utilisation below 75%, the optimism for a second good year for agricultural production from the monsoon rain forecasts, a low likelihood of a rise in crude oil prices, the fact that the markets have already factored in rate hikes by the US Federal Reserve, the low chances of all states implementing the increase in housing rent allowance for government employees recommended by the Central Pay Commission, and the fall in inflation from the implementation of the goods and services tax (GST).

But this was a standalone view. At its June 7 meeting, the MPC kept the repo rate, at which RBI infuses liquidity into the system unchanged at 6.25%.

According to Michael Patra, executive director of RBI, the focus should be on keeping inflation towards its medium-term target and not conducting monetary policy by looking at the past.

In May, consumer price inflation fell to 2.18% from 2.99% a month ago, well below the RBI’s medium target of 4%.

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