 "Aditi Nayar")
The Monetary Policy Committee (MPC) cheered markets by reducing the repo rate by 25 basis points (bps) in its debut meeting. The step was facilitated by the proliferation in kharif sowing and measures taken by the government to improve the outlook for food inflation. With the objective of growth also to be considered, particular emphasis was placed on concerns regarding the global economy which would weigh against the impending buoyancy in domestic economic impulses.
The committee demonstrated resounding consistency with all six members voting in favour of the rate cut. This easing was deemed to be consistent with the accommodative stance of monetary policy, the interim target of bringing Consumer Price Index (CPI)-based inflation to five per cent by FY17, as well as the medium-term inflation target of four per cent plus/minus two per cent.
The MPC views risks to the interim CPI-based inflation target as tilted to the upside, on account of factors such as revision in government pay scales and minimum support prices. However, it added the nuance that these risks are lower than what the Reserve Bank of India (RBI) had gauged during the previous two policy reviews.
Notably missing was a specific timeline within which inflation is to be brought to the midpoint of the medium-term target. In line with the RBI's last forecast, the MPC's projection for GVA growth for FY17 was articulated at 7.6 per cent, with evenly balanced risks. There was continuity in other parameters as well, such as the stance on neutral systemic liquidity.
Aditi Nayar
Senior Economist, ICRA
Senior Economist, ICRA
