Some MPC members doubt if growth would be sustainable: RBI minutes

Before the Reserve Bank of India’s (RBI’s) monetary policy announcement, the members of the Monetary Policy Committee (MPC) were worried as to whether growth could sustain even as inflation fears persisted, according to the minutes of the two-day meeting.

The six-member MPC met for two days, on April 4 and 5, to decide, with a five-to-one vote, that the policy repo rate should remain unchanged at 6 per cent.

RBI Deputy Governor Viral Acharya said he would favour rate hikes in future, but not now.

“I feel it is important to let some more hard data come in, especially on growth, and allow some more time to let the early skirmishes on the global trade front play out. I am, however, likely to shift decisively to vote for a beginning of ‘withdrawal of accommodation’ in the next MPC meeting in June,” Acharya said.

“Reinforcement of inflation-targeting credibility that such a shift would signal is crucial in my view for prudent macroeconomic management, on both the domestic and external sector fronts,” the deputy governor said.

The dissenting member, Executive Director Michael Debabrata Patra, voted for a 25-basis-point hike in the policy repo rate, casting doubts as to whether falling prices would sustain.

Patra said even as the fall in the inflation rate in January and February would continue in March, it didn’t make a case for an easier or neutral monetary policy stance.

“In my view, that will be time-inconsistent and will push the achievement of the inflation target farther out in time, given the current assessment that the target is not likely to be achieved during the full course of 2018-19, absent policy action,” Patra said.

Core retail inflation has remained sticky and the rate has “stubbornly” risen above 5 per cent over the past three months. 

“Over the course of 2018-19, inflation in this category is expected to peak close to 6 per cent in June and moderate in the rest of the year to settle at a little above 5 per cent,” Patra argued.

Patra said “impulses of growth are strengthening,” and are led by the pace of investment, in contrast to consumption-led growth in preceding years.

Key Takeaways

• Viral Acharya says will change his stance in June
• Some members doubt if growth would be sustainable
• MPC sounded concern on inflation 
• Capacity utilisation not enough to induce fresh investment
• MSP needs to be studied more to say if it would derail inflation target

However, Chetan Ghate, an external member, doubted if those impulses would sustain.

“My main concern in the last few reviews has been whether the ongoing cyclical recovery in growth will sustain, despite growing discomfort on the upside risks to the 4 per cent inflation target in the medium-term,” said Ghate. 

“There is a risk that the recent fraud in a public sector bank may make banks risk-averse and slow in lending,” Ghate said, voting for a pause and waiting for more data.

RBI Governor Urjit Patel, however, said the credit offtake was improving and becoming broad-based. Besides, the flow of funds from non-bank sources to the corporate sector was rising. 

However, he said inflation risks persisted.

“Even as inflation has moderated in recent months, several upside risks to inflation persist. Hence, I would like to wait for more data and watch how various risks to inflation evolve,” said Patel.

According to Ravindra Dholakia, who had earlier favoured rate cuts, the inflation rate is likely to rise from April for the next three-four months because its base is low, before again start declining. 

Dholakia said while capacity utilisation had improved marginally to 74 per cent from about 72 per cent, “it is still far below the threshold required to induce substantial fresh investment”.

Pami Dua, another external member, favoured a wait-and-watch policy, but said changes in minimum support prices should be “pursued in a systematic way to maintain the durability of the medium-term 4 per cent inflation target”.