Rising oil prices, weak rupee prompted MPC members to maintain status quo

A majority of the monetary policy committee (MPC) members wanted the cumulative 50 basis points increase in repo rate in June and August to work its way through the economy and, hence, voted to maintain status quo in the rate in the fourth bi-monthly monetary policy review.

Effect of inflation

Also, the need to be vigilant vis-a-vis the inflationary effect of pass-through of rising oil prices and weaker rupee, prompted the members to change the policy stance from ‘neutral’ to ‘calibrated tightening’, according the minutes of the MPC meeting released by the RBI on Friday.

Chetan Ghate, Professor, Indian Statistical Institute, cautioned that “despite the two hikes in the policy rate in the last two meetings, the data since August risks impairing our ability to keep headline inflation durably at 4 per cent.

“I say this fully cognizant of the trade-off facing the MPC: moving too quickly and needlessly shortening the growth turnaround or calibrating the rate hikes too slowly, and risking an overheating in an economy with a nearly closed output gap.”

Given the strong possibility of the unanchoring of inflationary expectations for the reasons given above, the appropriate “risk-management approach” would be to act now, Ghate said, adding the MPC should not allow the commitment to the 4 per cent target to be flexible.

Pami Dua, Director, Delhi School of Economics, observed that while inflation has softened, upside risks to inflation remain, along with some downside risks to output growth.

“The policy repo rate has already been increased in the past two consecutive meetings of the MPC (June and August), each time by 25 basis points. Due to the transmission lags, the effects of these may take time to play out. It is, therefore, best to pause and wait-and-watch while maintaining a vigil on inflation,” she said.

Ravindra H Dholakia, former Professor, Indian Institute of Management, Ahmedabad, said: “Now there is no case for any hike in the policy rate this time. This is the time for a pause to allow the consecutive rate hikes to sink in the system and settle down.”

Michael Debabrata Patra, Executive Director, RBI, said: “It is reasonable to keep the policy rate on hold in this meeting and to monitor the cumulative 50 basis points increase in June and August as it works its way through the economy.

“Inflation is set to rise over the period ahead in an environment in which the balance of risks is shifting to the upside. Monetary policy needs to move to high alert, and this needs to be reflected in a pro-active policy stance.”

Viral V Acharya, Deputy Governor, said it seems important to signal commitment to keeping to the (inflation target) mandate and move forward carefully at an appropriate time, allowing the economy to adjust to the past two back-to-back rate hikes while being vigilant of any emerging inflationary pressures.

Urjit R Patel, Governor, observed that moderation in inflation in the last two months has lowered the projected inflation trajectory.

“I vote for keeping the policy repo rate unchanged. Recognising that inflation risks have been persistent, and to reaffirm the commitment to securing the mandated 4 per cent inflation target on a durable basis, it is apposite to change the stance of monetary policy from “neutral” to “calibrated tightening”,” said Patel.

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