Monetary Policy Committee Votes As One But Some Differences Emerge

The monetary policy committee (MPC) which met on April 5-6 to decide on the course of interest rates in the economy voted unanimously to keep rates unchanged. In fact, the MPC has had a clean run so far and each of the four decisions have been taken without dissent. This, in fact, was highlighted as a distinguishing feature of the new regime in its monetary policy report released after the April decision.

Minutes of the April meeting, however, show an emerging divergence in views. The committee seems to be book-ended by the doves (Ravindra Dholakia) and the hawks (Michael Patra) with a majority of the members currently in the middle.

Patra, executive director at the Reserve Bank of India (RBI), in his statement showed a leaning towards a rate hike although he eventually voted in favour of a pause. Patra cites a need to move inflation closer to the 4 percent medium-term target set under the new monetary policy framework. This, in his view, could warrant a 25-basis-point hike, if not now, then once the impact of transitory factors (such as demonetisation) on data abates.

At the other end of the spectrum was Dholakia, an external member, who felt that inflation risks are being overstated. His projections peg inflation at levels at least half a percent lower than the RBI’s. Dholakia expects inflation at close to 4 percent in the first half and about 4.5 percent in the second half, suggesting that he would see little need for a rate hike even later in the year.

Monetary Policy Committee Votes As One But Some Differences Emerge

Apart from Patra and Dholakia, the rest of the six-member committee toed the middle line.

RBI governor Urjit Patel noted some possible upside risks to inflation including increasing input prices and the pressures that may emerge from an increase in house rent allowances recommended under the 7th Pay Commission. He added that the inflation outlook warrants “close vigilance”. On growth, the governor said that economic activity is expected to pick up in 2017-18, although investment activity continues to be weak due to low levels of capacity utilisation. On balance, Patel voted in favour of a status quo and gave no hints on which way he sees rates move from here on.

Notwithstanding likely favourable base-effects in the next few months, the outlook for inflation calls for close vigilance with a view to ensuring that the mediumterm inflation trajectory evolves in line with the objective of bringing headline inflation closer to 4.0 per cent on a durable basis and in a calibrated manner.  
Urjit Patel, Governor, RBI

Deputy Governor Viral Acharya said that inflation risks are evenly balanced but noted that there is some uncertainty over when inflation may once again cross the 4 percent mark and whether it would keep inching higher. Acharya added that apart from other upside risks to inflation, such as higher commodity prices, the fiscal influence on inflation should also not be disregarded.

“We have laid out in the resolution several upside risks, of which geopolitical risks and undoing of the center’s fiscal discipline by the states concern me the most,” said Acharya.

Away from inflation, Acharya highlighted the need to resolve stressed assets and to correct weak bank balancesheets. He also noted the need to mop up liquidity in a more durable manner to ensure that market rates stay close to the policy rate.

At its April monetary policy review, the RBI kept the repo rate unchanged at 6.25 percent but raised the reverse repo rate by 25 basis points to 6 percent. This was done to narrow the interest rate corridor and bring market rates closer to the policy rate. Since then, the RBI has announced treasury-bill auctions of Rs 1 lakh crore under the market stabilisation scheme to suck out excess liquidity.