RBI Governor Urjit Patel, RBI deputy Governors NS Vishwanathan, BP Kanungo and Viral V Acharya arrive for a press conference at RBI headquarters in Mumbai. (Source: Shashank Parade/PTI)

MPC Minutes: Split Set To Deepen As Viral Acharya Leans Towards Rate Hike

India’s monetary policy committee, so far tilted in favour of a ‘wait and watch’ view on interest rates, may see two of six members vote for a rate hike when its next meeting rolls around.

Minutes of the MPC meeting, released today, show that Reserve Bank of India Deputy Governor Viral Acharya will likely vote for ‘withdrawal of accommodation’ when the committee meets in June. Acharya will join RBI Executive Director Michael Patra in seeking tighter monetary policy in an attempt to bring inflation down the mid-point of the MPC’s flexible inflation target of 4 (+/- 2) percent. Patra voted for a 25 basis point hike in the repo rate at the February and April meetings.

The MPC kept interest rates unchanged at 6 percent in April, with a vote of 5-1.

The Rate Hike Camp

Acharya, in explaining his evolving view on monetary policy, said that it is important to reinforce the MPC’s inflation-targeting credibility. This, he believes, is crucial for prudent macroeconomic management.

At the February meeting, Acharya said he was watching for two factors – the shale gas supply response to rising global oil prices and the stability of the domestic economic recovery. Acharya now believes that the risk of oil prices staying elevated is higher than believed due to declining inventories. He is also of the view that the growth recovery is durable and the output gap in the economy is closing. The output gap is the difference between the potential output and actual output of an economy.

In view of the above referred developments since the last MPC meeting, I have moved substantially closer to switching from the neutral stance to beginning the process of withdrawal of accommodation. This is in spite of the softening of inflation in recent prints.
Viral Acharya, Deputy Governor, RBI

Both Acharya and Patra flagged off higher core inflation as a concern. While headline inflation in the January-March period has been below the RBI’s forecast, core inflation has been sticky.

In March, headline CPI inflation moderated to 4.28 percent, for the third consecutive quarter. Core inflation, however, continued to rise hitting a 43-month high. This, according to Patra, could further delay the achievement of the 4 percent inflation goal. The target is unlikely to be met during 2018-19 without policy action, Patra said.

The main risks to the achievement of the target are festering in the category of CPI excluding food and fuel in which inflation has stubbornly risen above 5 percent over the past three months. Over the course of 2018-19, inflation in this category is expected to peak close to 6 percent in June and moderate in the rest of the year to settle at a little above 5 percent.
Michael Patra, ED, RBI

The Wait-And-Watch Camp

The remaining four members of the MPC, including RBI Governor Urjit Patel, continue to wait for more data to make a judgement on the future course of interest rates. Patel noted that while inflation has moderated in recent months, several upside risks to inflation persist.

According to Patel, the outlook for inflation faces uncertainties from:

  • The increase in minimum support prices for kharif crops
  • Elevated and volatile crude oil prices
  • Impact of revision in HRA by various state governments
  • Fiscal slippages by the Centre and the states
  • Performance of the monsoon

“Hence, I would like to wait for more data and watch how various risks to inflation evolve, going forward. I, therefore, vote for holding the policy repo rate at the current level and maintaining the stance as neutral,” said Patel.

At the April meeting, the RBI cut its inflation forecast for 2018-19. It now expects CPI inflation in the first half of the year at 4.7-5.1 percent, and inflation in the second half of the year is seen at 4.4 percent.

MPC member Ravindra Dholakia believes that the 4 percent inflation will be achieved over the next 12 months. However, he voted for a status quo citing several uncertainties around the forecast.

In the baseline scenario, we are likely to be at or around the target rate of headline inflation 12 months down. There are, however, several uncertainties and concerns surrounding this forecast.
Ravindra Dholakia, Member, MPC

Pami Dua noted that growth prospects are still lacklustre and, hence, chose to vote for a status quo despite upside risks to inflation.

Chetan Ghate, while supporting the status quo vote, flagged off two structural risks to inflation. One of these is the change in the minimum support price policy announced by the government in the budget. Ghate’s research suggests that this could increase inflation across sectors and its impact could last for a period of six to seven quarters. “The response to changes in the MSP would therefore need to be pursued in a systematic way to maintain durability of the medium-term 4 percent inflation target,” said Ghate.

He also raised concerns about the higher oil prices, saying that “such twin terms of trade shocks would complicate inflation management and worsen the growth-inflation trade-off.”