RBI governor Urjit Patel is a dove, not an owl; rate cut likely in Dec

Reserve Bank of India governor Urjit Patel, who had once said the central bank should be termed an owl, it turns out, could actually be a dove.

According to a report in The Economic Times, in his first meeting with economists after taking over as the RBI governor, Patel has dropped indications that he may be a dove for now with growth considerations outweighing inflation risks in his mind.

Urjit Patel. Reuters

Urjit Patel. Reuters

According to a source aware of the discussions between the governor and economists, in Patel's opinion the Goods and Services Tax would not spike inflation as there are many items that will witness a fall in prices which will partially offset the rise in prices of certain other items.

More importantly, he feels the weight of public sector housing and rent in the consumer price index should be lowered.

This is significant because after the Seventh Pay Commission award, there are fears that higher house rent allowance for the central government staff will result in higher inflation rate. If the rate is cut, the impact will also be lower.

As of now, housing has 10 percent weight in the CPI. The housing inflation in August was 5.29 percent, while the CPI-based inflation stood at 5.05 percent.

The RBI's next monetary policy review is on 4 October. Though the government has appointed three members in the Monetary Policy Committee - a mechanism that has been put in place through an agreement between the central bank and the government to decide on the policy rate - it is not sure whether the panel will be in charge of the next meeting.

A report in The Deccan Chronicle notes that the three new members - Indian Statistical Institute professor Chetan Ghate, Delhi School of Economics director Pami Dua and IIM-Ahmedabad faculty Ravindra H Dholakia - "are yet to receive the required vigilance and IB clearance", the report says.

If the clearance does not come on time, the present system of the RBI governor deciding the rate and monetary policy with help from the technical advisory committee, will have to be continued on 4 October.

However, it remains to be seen whether the governor will go for a rate cut as early as October. A survey of 10 economists done by The Business Standard has found that a majority of six respondents feel that the RBI will pause in October and go ahead with a rate cut in December. The report notes that this split verdict is a departure from the recent pre-policy polls where the prediction of a pause was unanimous by respondents.

This time the hopes of a rate cut is on the rise mainly because of the fall in retail inflation which has given policy leg-room for the central bank.

The retail inflation rate in August fell to 5.05 percent from 6.07 percent due to the good monsoons.

The ET report citing sources says, even if the RBI does not cut rate in October, the governor is likely to release a dovish statement.

For the North Block mandarins, who have been pitching for a rate cut to push growth, this should come as a big relief.

Updated Date: Sep 26, 2016 14:44 PM

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