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There was a meeting of minds when the six members of the Monetary Policy Committee (MPC) met over two days — October 3 and 4. At the committee’s maiden meeting, it unanimously voted for a cut of 25 basis points in the repo rate from 6.50 per cent to 6.25 per cent.
The MPC members expected a strong improvement in sowing, along with supply management measures, to improve the food inflation outlook.
In the Minutes of the Monetary Policy Committee Meeting released by the RBI on Tuesday, the members noted that the sharp drop in inflation reflects a downward shift in the momentum of food inflation — which holds the key to future inflation outcomes — rather than merely the statistical effects of a favourable base effect.
The members of the Committee are Urjit R Patel (RBI Governor), R Gandhi (RBI Deputy Governor), MD Patra (Executive Director, RBI), Chetan Ghate (Professor, Indian Statistical Institute), Pami Dua (Director, Delhi School of Economics), Ravindra H Dholakia (Professor, IIM-Ahmedabad).
With all the members voting in favour of a cut in repo rate (the interest rate at which banks borrow short-term funds from the RBI to overcome liquidity mismatches), the RBI gave effect to the unanimous decision in its fourth bimonthly policy review on October 4.
Food inflation Referring to the several measures announced by the government to cool food inflation pressures, especially with regard to pulses, the Committee members assessed that these measures should help in moderating the momentum of food inflation in the months ahead, thereby opening up space for policy action. Easy liquidity conditions engendered by the RBI’s operations should also enable the smooth transmission of the policy action through various market segments, the Committee added. Furthermore, banks should find added impetus for better transmission (through lending rate cuts) by the recent downward adjustment in small savings rates.
The Committee took note of potential cost push pressures that may emerge, including the 7th Pay Commission award, on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices. The fuller play of these will need vigilance to prevent a generalised cost spiral from taking root.
On balance, the Committee envisaged a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bimonthly monetary policy statements of June and August, respectively.
The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the target level of 4 per cent.
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