MPC minutes: The tale of how five hawks at RBI dominated over the lone dove for a 4% inflation target

The minutes of the Monetary Policy Committee (MPC) released on Thursday give a clear indication that the rate-setting panel is dominated by inflation hawks. There were five of them and one dove on the panel that agreed for a quarter percentage point hike, second in a row, in Rerserve Bank of India's key lending rate, repo, in the August bi-monthly review of the annual monetary policy.

Chetan Ghate, Pami Dua,  Michael Debabrata Patra, Viral V Acharya and Urjit R Patel voted in favour of the decision while Ravindra H Dholakia voted against a rate hike. The MPC had hiked the repo rate to 6.5 percent on 1 August raising abundant caution on the inflation risks going ahead. The risks they cited include more upside in the crude oil price, global markets volatility, significant pick up in the household inflation expectations and the full impact of monsoon and so on.

The MPC minutes throw more insight on the comments of each member on the inflation fight. The panel is dominated by hawks determined to achieve the medium-term inflation target of 4 percent. All the five members who voted for a rate hike highlighted the threat to inflation from the increase in the minimum support price (MSP) announced by the government. The most emphatic statement on this point, arguably, came from Micheal Patra. “The risk of failing to achieve the inflation target, and of being perceived as willing to accommodate deviations over the remaining period for which the MPC is tasked, has increased significantly,” Patra said. “This could unhinge inflation expectations, dent the credibility of the MPC and allow inflation outcomes to test the upper tolerance band. This evolving configuration warrants an adequate monetary policy response, so that inflation realigns with the target and inflation expectations remain anchored,” Patra added.

Representational image. Reuters

Representational image. Reuters

After showing largely an upward trend for several months, the July retail inflation came at a nine-month low of 4.17 percent with the decline seen across most segments. Vegetable inflation declined by (-) 2.19 percent in July, compared to 7.8 percent in June, fruits inflation slowed down to 6.98 percent, as against over 10 percent in the previous month. Besides, the inflation in protein-rich items like meat and fish, and also milk too came slower while 'fuel and light' increased to 7.96 percent from 7.14 in the previous month. The core inflation, or non-food, non-oil manufacturing inflation continued to remain high. In July, the figure stood at 5.82 percent and has remained elevated above 5 percent for the last eight months.

One added worry for MPC, going ahead, would be the freefalling domestic currency. The rupee has fallen past the psychologically important 70 mark against the US dollar and is still sailing in rough waters. This, along with the fragile fiscal deficit picture, could put more pressure on the MPC while it charts the future course of rate action. One of the members, Chetan Ghate, stressed the likelihood of inflation being impacted by rising wages. “Organized sector wages – a proxy for pay inflation – continue to rise and need to be carefully watched,” Ghate said.

Pami Dua, another member who voted in favour of hike pointed the risks arising on account of higher fiscal slippage and higher input costs on inflation. Fiscal slippages by governments may have adverse implications for market volatility, and may crowd out private investment and impact the outlook for inflation, Dua said.

The lone dove on the panel, Ravindra Dholakia, presented his case against the rate hike. “The argument of a pre-emptive consecutive rate hike at this stage pre-supposes: (a) complete failure of the rate hike effected in the June 2018 policy on impacting the inflationary expectations in the economy, and (b) headline inflation forecasts ex-house rent revisions a year ahead increasing further without any uncertainty. Neither of these two pre-suppositions is correct,” Dholakia said. But there were not any takers for this view. The persisting inflationary headwinds have prompted rating agency India Ratings and research to lower its fiscal year 2019 GDP growth forecast to 7.2 percent.

If the MPC minutes offer any clue, one more rate hike is pending for this year. But, much will depend upon the exchange rate movement, the MSP impact and more importantly how the global situation evolves and what it means for the crude prices. For now, the hawks on the MPC have a clear upper hand.


Updated Date: Aug 17, 2018 11:26 AM

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