Inflation Worries Rattle Asia’s Most Dovish Policy Makers

(Bloomberg) -- India’s surging inflation rattled members of the Monetary Policy Committee, prompting them to unanimously vote for keeping interest rates steady.

That the door was kept open for future easing highlighted the six-member panel didn’t entirely sacrifice its focus on economic growth, minutes of the Dec. 3-5 meetings released on Thursday showed. The MPC this month opted to hold the benchmark rate at 5.15%, while retaining its accommodative policy stance.

Governor Shaktikanta Das, who’s led the panel in delivering Asia’s most aggressive rates easing this year, said the easy policy stance would remain as long as necessary to revive growth, while ensuring that inflation was within the target. Ravindra Dholakia, who voted for a deeper 40 basis points cut in October, said the current spike in headline inflation led by higher food prices was due to “temporary supply shocks.”

Key Insights

• Das said there is a need for greater clarity on how the overall food inflation path is going to evolve as there is some uncertainty about the outlook of prices of certain non-vegetable food items such as cereals, pulses, milk and sugar. It was also not clear as to how the recent increase in telecommunications charges would play out, even as demand conditions have weakened
• Bibhu Prasad Kanungo, the deputy governor overseeing RBI’s monetary policy department, pushed for status quo, opting for a “wait and watch” view. His colleague Michael Patra said that with 135 basis points of interest rate reductions and fiscal policy actions working their way into the economy, it was apposite to allow this pass-through to take place
• Chetan Ghate, an external member of the MPC, said he was worried that real wage growth in the organized sector has weakened. Despite lackluster growth and surging inflation, he thought monetary policy was in a good place right now
• The rate decision came just days after data showed quarterly growth in gross domestic product slowed to a new six-year low of 4.5%. But policy makers cited “much higher than expected” inflation for opting to pause on rate cuts
• Their reasoning was vindicated a week later when November inflation data showed gains in consumer prices inching closer to the upper end of the RBI’s 2%-6% target band

Get More

• All six members voted to keep rates unchanged. The RBI, has lowered rates by a total 135 basis points this year, though banks haven’t passed on all of that easing to borrowers
• The central bank raised its inflation forecast for the second-half of the fiscal year to 4.7%-5.1% from 3.5%-3.7% seen previously.
• To read the full minutes, click here

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Jeanette Rodrigues

©2019 Bloomberg L.P.