The Reserve Bank of India headquarters in New Delhi. (Photographer: Kuni Takahashi/Bloomberg)

MPC Minutes: Members To Wait And Watch Due To Volatile Inflation Print

All six members of India’s monetary policy committee had voted for holding back on any rate action during the fiscal policy announcement on Dec. 5.

The committee had decided on not taking any action on the repo rate in the latest monetary policy announcement, while continuing with a calibrated tightening stance, which it had adopted in its previous announcement in October.

According to the minutes of the committee’s meeting which was released on the Reserve Bank of India’s website, the members noted that while the central bank’s forecast showed a decline in the inflation print in the next 12 months, recent volatility in the inflation numbers had forced the committee to consider a wait and watch approach.

The inflation forecast for the second half of the current financial year had been cut to 2.7-3.2 percent from 3.9-4.5 percent earlier. For the first half of financial year 2019-20, the inflation forecast is pegged at 3.8-4.2 percent.

A Hazy Inflation Picture

While all members noted that the inflation outlook remained stable, they agreed that more data was needed before the MPC could take comfort from it. Members Chetan Ghate and Pami Dua noted that upside risks to inflation still exist and need to be watched closely.

According to Ghate, while the median inflationary expectations for the next one year have remained stable, those for the next three months had shown a decline. This, he said, pointed at households not expecting the current drop in inflation to continue for a long time.

In her commentary, Dua said that while global crude prices have softened, they may spike again due to supply side risks. Moreover, fiscal slippages by the government may have adverse implications for market volatility and impact the outlook for inflation.

Upside risks associated with an increase in minimum support prices still persist. Risks due to an increase in state-level HRAs (house rent allowance) and input prices also prevail.
Pami Dua, Member, Monetary Policy Committee.

Member Ravindra Dholakia, however, pointed out that the recent drop in food inflation numbers and global crude prices warrant a policy action by the committee. Moreover, the 120-basis point drop in the RBI’s inflation forecast had given considerable headroom for the committee to consider this option.

In his commentary he pointed out that if the MPC did not take any action to such a major favourable shock, it would run the risk of being considered neither current nor relevant.

Since the MPC had adopted a calibrated tightening stance in the October policy announcement, there was no space for any rate cut immediately, Dholakia said in his comments. Dholakia had voted against changing the stance in the October meeting.

“The best we can do under the circumstance is to hold the rate, but change the stance to neutral to take care of all possible uncertainties,” Dholakia said. “We shouldn't deny any possibility of either a rate cut or a rate hike in the near future depending on data coming in.”

Rare Divergence In Food Inflation

RBI Deputy Governor Viral Acharya pointed at a variation in food prices that has rarely been noted before. In his comments he said that there was a need for a thorough assessment of the recent drop in food inflation, since there is divergence in the direction of price movements in data in key food items provided by the Department of Consumer Affairs and realised food inflation for October.

Moreover, inflation, excluding food and fuel, remains persistently high, Acharya said.

“It is over 6 percent at present, with only 20-30 basis points attributable to the statistical impact of Centre’s house rent allowances,” the deputy governor said.

Secondly, market indicators of uncertainty in international crude oil prices remain high, reflecting the unexpectedly large gyrations in their movement this year and upcoming geo-political risks such as OPEC supply decision and trade war uncertainty’s impact on global demand. The implied volatility in crude oil options markets was around 25 percent per annum in October, which rose to around 45 percent per annum following the oil price crash. This is a rather high level of uncertainty embedded in expectations of market participants.  
Viral Acharya, Deputy Governor, RBI.

Room For A Rate Cut In The Future?

Former RBI Governor Urjit Patel noted that while the inflation projections had been revised downward, some risks persist. In his last MPC meeting as the governor of the central bank, Patel said that these risks are in the form of:

  • A sudden reversal in food inflation trends
  • Uncertainty about the exact impact of minimum support price on food inflation
  • Uncertainty in oil price trajectory
  • Volatile financial markets
  • Likely staggered impact of house rent allowance revisions by states
  • Risk of fiscal slippages at Centre or state levels.

“With the general government (Centre plus states) fiscal deficit budgeted at about 6 per cent of GDP in 2018-19, the extant national fiscal stance continues to be more akin to a “shock amplifier” rather than a “shock absorber” for our macroeconomy,” Patel said.

However, he said, if these risks do not materialise in the way that they are being outlined, the MPC could have the option of taking the appropriate action in the future, hinting at a possible rate cut.