INSUBCONTINENT EXCLUSIVE:
Kolkata: Kolkata: Government's higher support prices for farm products drove five of the six members of the Monetary Policy Committee to
vote for an increase in interest rate for the second time in a row, but Governor Urjit Patel and his deputies were for maintaining the
neutral stance, which would provide room to twist policy in either direction.
Vulnerabilities arising from global financial markets
continues to impart uncertainty to the inflation outlook, minutes of the last MPC meeting observed.
“In view of several uncertainties that
are present, I maintain the neutral stance of monetary policy,” RBI Governor Urjit Patel said
“As inflation risks have continued to be elevated, I vote for an increase in the policy repo rate by 25 basis points
This action is a necessary step towards securing the mandated 4 per cent inflation target on a durable basis,” he said.
RBI raised repo
rate by 25 basis points to 6.5% on August 1, second time in a row
Repurchase rate, or repo, is the rate at which the RBI lends money to commercial banks as part of its liquidity management exercise.
The
committee was not comfortable as inflation drifted away from the 4% target
“Much work lies ahead in making monetary policy more credible and anchoring inflationary expectations,” MPC member Chetan Ghate said.
He
said that higher MSPs have the potential of pushing headline inflation sustainably and significantly beyond the 4% target
“While the final inflationary impact will depend on the exact procurement policy which is yet to be announced, given the magnitude of the
MSP surprise, it is opportune to frontload a rate hike,” Ghate said.
Even as inflation projections for Q2 have been revised marginally
downwards against the June statement, projections for Q3 onwards remain broadly unchanged as several upside risks persist
For example, the geopolitical tensions and supply disruptions remain an upside risk to oil prices and volatility in global financial markets
continues to impart uncertainty to the inflation outlook
The fall in global demand due to intensification of protectionist trade policies could pull down oil prices.
Pami Dua said fiscal slippages
by governments may have adverse implications for market volatility, and may crowd out private investment and impact the outlook for
inflation.
Ravindra H Dholakia voted for status quo arguing that real policy rate is very high compared to most other countries and is
adversely impacting capital formation.
Deputy governor Viral Acharya argued that two consecutive rate hikes would help rein in demand
pressures and manage inflation expectations
“This transmission will occur with a lag
Since that is somewhat far and there is an important interim uncertainty in the form of tariff wars which can rock global growth, financial
markets and inflation in abrupt and unexpected ways, I vote to retain the neutral stance of monetary policy,” he said.
The households’
inflation expectations, as measured by RBI’s survey, have risen significantly in the last two rounds, which could influence actual
inflation outcomes in the months to come, the minutes said.
