MPC: Several uncertainties on fiscal, external fronts persist, says Patel

Two MPC members specifically warned that India may no longer be able to afford being accommodative on inflation

Minutes from the Reserve Bank of India's most recent policy meeting released on Wednesday showed members of the policy panel growing increasingly concerned about inflation, with some issuing sharp warnings against being complacent.

The central bank's monetary policy committee (MPC) voted 5-1 on Dec 6 to keep the policy rate on hold at 6 per cent after inflation accelerated to a seven-month high.

The minutes of their meeting showed members were growing concerned that inflation would accelerate above the RBI's 4 per cent target, having identified global crude and food prices as areas of particular concern - predictions that have been validated by inflation data after the meeting.

RBI Governor Urjit Patel added that several uncertainties, especially on fiscal, external fronts persist and it's important to be vigilant.
 

Two of the members, both Reserve Bank of India (RBI) officials, specifically warned that India may no longer be able to afford being accommodative on inflation, even as most members noted they were mindful about a recent slowdown in economic growth.

The comments appeared to further reduce the prospects the RBI would cut interest rates. The central bank took advantage of an extraordinary period of low inflation to cut rates by a total of 200 bps from January 2015 to August this year, but has since grown increasingly worried about rising prices.
 

"The time has come for monetary policy to take guard and be ready to go on to the front foot," Michael Patra, an executive director at the RBI, was quoted as saying in the minutes.

Data after the RBI's meeting have seemed to confirm some of the members' predictions, with inflation accelerating to a 15-month high of 4.88 per cent in November, up from the 3.58 per cent in October that MPC members had seen before its meeting.

The inflation report would appear to rule out any RBI rate cuts to support an economy that may have halted a five-quarter slide by growing 6.3 per cent in the three months to September, but is still expanding well short of the 8 percent needed to create enough jobs for its young workforce.

A dissenting member, academic Ravindra H Dholakia, had voted for a 25 bps cut on Dec 6.

The "real cause of concern right now is the economic recovery and its slow pace", he argued, according to the minutes.

Still, members appeared to indicate the RBI continued to view its "neutral" stance as appropriate, amid investor fears the bank could soon shift to a "tightening" stance, setting up the prospect of rate increases later next year.

"There seems little scope for accommodation, or for change of stance at the present juncture," said RBI Deputy Governor Viral Acharya.