Inflation concerns prompted members to pause: RBI MPC minutes

MUMBAI: All most all members of the RBI's MPC voted for a pause n policy rates in its February 06, meeting on inflation concerns rather than growth as it had overshot the medium-term target with most members except external member Chetan Ghate seeing space for future rate cuts, according to the latest MPC minutes released by the central bank.

Headline inflation, measured by CPI inflation, increased to 7.4% in December 2019 (highest since July 2014) due to a sharp rise in food inflation to 12.2%, which in turn was due to a sharp rise in onion prices. The Reserve Bank had kept the key policy rate-repo rate- unchanged at 5.15 per cent while keeping an accommodative stance, amid uncertain inflation outlook growth concerns and also hopeful of the fiscal policy to push growth which slowed to 4.5 per cent in the September quarter.

“While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain” said governor Shaktikanta Das who voted for a pause. Das acknowledged that the budget has sought to provide counter-cyclical support to the economy while broadly adhering to fiscal prudence. But “ Monetary transmission and bank credit flows have improved, but they need to become stronger” he added.

RBI sees several green shoots in the form of higher rabi sowing by 9.5 per cent and higher IIP in November after contracting for three previous months. Also personal income tax rationalisation and higher rural infra spends should help revive demand. “Going forward, the recent rise in food prices should boost rural incomes and help strengthen rural demand” said newly inducted MPC member, Janak Raj.

Even as onion prices have cooled, risks to inflation from other segments continue. January retail inflation was even higher at 7.59 per cent. Upside risks include an increase in global food prices and commodity prices and an increase in input costs for services. Besides, imports from China could be disrupted due to the spread of coronavirus and also exert pressure on Chinese import prices, according to external member Pammi Dua.

“Monetary policy has headroom to respond to the evolving macroeconomic configuration, but a good fix is needed on the shape of the inflation hump it has chosen to look through” said deputy governor, Michael Patra. “Hardening prices of proteins and pulses and a range of cost pushes to core inflation are new and ominous risks to the inflation outlook if they persist”

With the exception of external member Chetan Ghate most see space for future rate cuts “While I don’t see space for further cuts going forward, I remain data dependent” said external member Chetan Ghate. “ While the current spike in headline inflation is likely to lack persistence, the inflation numbers should be carefully watched”