The six-member monetary policy committee (MPC), which met for the first time earlier this month, justified its vote to cut the Reserve Bank of India’s policy rate citing a ‘real’ slowing in retail inflation and the need to support economic growth, the minutes of the MPC’s meeting show.
The rate-setting committee’s members also expect the outlook for food inflation and economic growth to improve, according to the minutes released by the RBI on Tuesday, the fourteenth day after the meeting.
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“The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook,” the MPC noted according to the minutes posted on the RBI’s website.
“The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award.”
The RBI had on October 4, cut the repo rate by 25 basis points to 6.25 per cent, based on the MPC’s unanimous vote to support growth, and consistent with an accommodative monetary stance.
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“The reduction in inflation in August is more real than statistical — a collapse in momentum which allowed the play of base effects,” Michael Debabrata Patra, executive director of RBI and MPC member, said in his statement, while voting in favour of the rate cut.
“This is not to say that the beast has been beaten or it’s back broken, but there is a turn in its momentum that is exploitable, especially by measures that hold down month-on-month changes in prices of essential food items,” Mr. Patra said.
RBI Governor Urjit Patel noted that indicators of economic activity pointed to a subdued outlook, though gradually improving.
He also echoed the members’ views that, though lower than before, there still were upside risks to achieving the March 2017 retail inflation target of 5 per cent.
‘Upside risks’“While our model-based projections indicated upside risks to the target, a calibrated policy judgement was warranted, given that some space for policy action had opened up with the fall in inflation in the August reading,” Mr. Patel said.
“Nonetheless, inflation outcomes in Q4 will have to be carefully and continuously monitored as upside risks, albeit lower now than before, persist,” he said.
Most members acknowledged efforts by the government to address supply side issues which impacted food inflation positively.
“In view of a good monsoon, a decline in food inflation and better food supply management by the government, there has been some abatement of both cyclical and structural risks to the March 2017 consumer price index inflation target,” said Chetan Ghate, one of the three external members.
However, he said, “The persistence of core inflation remains a concern.”