A majority of the members of the Reserve Bank of India’s (RBI) monetary policy committee, which met on October 3-4, noted an increase in inflation risks, according to the minutes of the meeting released by RBI on Wednesday. The committee kept the policy rate unchanged at 6%.
One of the members, Chetan Ghate, had observed that the fall in retail inflation which began in March, had turned out to be a temporary one as the headline inflation rose 200 bps in the last two months.
The MPC had voted 5-1 to leave the repo rate unchanged at 6%, while Ravindra Dholakia remained the sole dissenter who voted for a 25 bps rate cut.
RBI Governor Urjit Patel also observeda rise in headline inflation in the last two months.
“For keeping headline inflation close to 4% on a durable basis, it is important to recognise near and medium-term risks to the inflation outlook,” Mr. Patel said.
“We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach. I, therefore, vote for keeping the policy repo rate on hold, while maintaining the stance as neutral,” he added.
Michael Debabrata Patra, one of the members who had suggested an increase in the rate in the April policy, said: “Recent inflation prints have vindicated my stance.”
Mr. Patra, while voting for keeping the interest rate unchanged, said he was voting for a status quo, as long as inflation readings stayed within the target of 4%.
“It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further,” Mr. Patra said.
In a note to its clients, Nomura said the MPC minutes suggested that there would again be a pause in the next policy meeting scheduled in December.
“Overall, the minutes suggest that while Ravindra Dholakia and Michael Patra will continue to vote for a cut and a pause, respectively, the response of the other four MPC members will depend on how well growth holds up. The next GDP print for Q3 [of 2017] – out on November 30 – will be particularly important,” the note said.
Nomura said CPI inflation was likely to moderate to about 3% in October. But as the drop is driven by food prices, and while core inflation is likely to stay above 4% amid rising risks of a fiscal slip, it expected the rates to stay unchanged in their baseline scenario, including at the next policy meeting on December 6, with a 5-1 vote.
