Monetary Policy Committee Minutes Suggest Room For More Rate Cuts
Economists expect RBI to cut rates by atleast another 25 basis points
India’s six-member monetary policy committee (MPC) sees inflation pressures declining due to a strong monsoon and structural reforms, which prompted it to recommend a 25 basis point interest rate cut ahead of the Reserve Bank of India’s October 4 policy review.
Minutes of the MPC meeting released on Tuesday showed that the Committee expects the strong improvement in sowing, along with supply management measures, to improve the food inflation outlook. Most members were of the view that the recent drop in food inflation is more than just statistical and will help the RBI meet its 5 percent target by March 2017.
The October review was the first conducted by an MPC with each member having one vote and the RBI governor having a casting vote. The decision to cut rates was unanimous.
The minutes released carry the individual views of all the members. RBI governor Urjit Patel was of the view that upside risks to inflation have reduced compared to before, showed the minutes.
Outlook For Inflation
A strong monsoon is pulling down prices quicker than expected, pushing inflation to levels well below the RBI’s target of 5 percent by March 2017.
Consumer price inflation fell to a 13-month low of 4.3 percent in September compared to 5.05 percent in August, driven down by food prices. Wholesale inflation fell marginally to 3.57 percent in September 2016 from 3.74 percent in August.
Over the past two months, retail inflation has fallen by more than 170 basis points from over 6 percent in July, giving the RBI room to cut rates further.
All six members focused on this decline in inflation.
Chetan Ghate noted that while the persistence of high core inflation remains a concern and upside risks to the 5 percent target for March 2017 remain, these risks are “acceptable.”
The modest softening of inflation and inflation expectations provides a window for reduction in the policy rate, noted Pami Dua while adding that this is a good time to support growth.
Of the three external members of the MPC, Ravindra Dholakia came across as the most dovish.
Looking forward, in my opinion, the probability of inflation turning up from the current level is reasonably less. On the other hand, there are good chances for the consumer inflation to soften further substantially, benefiting from a good monsoon, supply management measures of the Government and ongoing reforms gaining traction in terms of reducing costs and improving output response.Ravindra Dholakia, Member, Monetary Policy Committee
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Is The MPC More Dovish Than Rajan?
The RBI, under the new monetary policy framework agreement, has a mandate to maintain retail inflation in a band of 4 percent (+/- 2 percent). Former governor Raghuram Rajan had suggested that he would like to see inflation come down to 4 percent by March 2018, which would have limited space for rate cuts in 2017 as core inflation has remained stubbornly close to 5 percent.
Urjit Patel, the current governor of the RBI, however, indicated that he may be comfortable with inflation remaining within the stipulated band.
The minutes of the MPC made no mention of attempting to meet the 4 percent inflation target by March 2018. All six members expressed a reasonable degree of comfort on meeting the 5 percent inflation target for March 2017 but did not speak of the outlook for inflation in fiscal 2018.
Michael Patra, executive director of the RBI noted that it is crucial “to step up vigil around the upturn in inflation projected in the last quarter of 2016-17 to guard against any risk to the target.”
All six members were also of the view that the revival in growth remains patchy with no signs of a pick-up in investment demand. R Gandhi, deputy governor of the RBI cited this as one reason behind his decision to support a rate cut.
Recent data on production of capital goods, imports of capital goods and flow of credit to industry indicate the weak state of investment demand. In this environment, a rate cut according to me will help in stimulating investment demand while also easing somewhat the pressure on firms stemming from balance sheet repairs.R. Gandhi, Deputy Governor, Reserve Bank of India
What The Market Will Read Into The Minutes?
Following the October 4 policy, most analysts took note of the dovish note struck by the RBI governor and said that atleast one more rate cut is in the offing. The MPC minutes reinforce that view.
If inflation continues to move lower, a rate cut in the December policy cannot be ruled out, said Madan Sabnavis, chief economist at CARE Ratings. He added that if banks pass through the RBI’s rate cuts, it could boost consumption demand particularly during the festive season.
DK Joshi, chief economist at CRISIL shared that view and felt that the MPC minutes are in line with comments made by the RBI at the time of the policy review. He, too, felt that a December rate cut remains on the cards.
