MUMBAI: It was a no-brainer for the RBI’s Monetary Policy Committee (MPC) to keep repo rate unchanged in its recent review for two key reasons: upside risks to inflation and unanimity within the panel, despite a slight divergence in views.
It takes at least three members to secure a rate rise or reduction, but piecing together this caucus of doves or hawks looks remote for now considering their united stance. The upside is that, this time around, internal and external members aired differing views and estimates on inflation – the cornerstone of RBI’s policy-making. The last time the MPC got to voice varying thoughts since its inception was: never.
Michael D Patra, RBI’s executive director, and in charge of monetary policy, was hawkish favouring an increase in the repo rate by 25 bps as a pre-emptive move to curb inflation pressures, only to later agree with the rest to hold rates, according to minutes of the review released Thursday.
On the other hand, sounding dovish, external member Ravindra Dholakia pegged inflation at 4-4.5 per cent, lower than RBI’s, perhaps indicating that the central bank was overstating inflation risks. He, however, voted for a pause in rates.
At the end, much like the previous reviews, the panel voted 6-0, staying collective in its effort to keep inflation at 4 per cent, with an elbow room of 2 percentage points at either side. Not that the market had any expectations of a rate cut, considering the MPC’s unexpected move to neutral stance in February. It now believes, there’s enough evidence that core inflation will likely cause trouble and the panel will only be justified in lowering rates provided inflation cools.
Citing upside risks to inflation, the panel in its first bi-monthly policy review on April 6 maintained status quo, but surprised analysts with a 25 bps cut in reverse repo to slosh out excess liquidity.
But, RBI Governor Urjit Patel believes there is room to lower lending rates, as banks passed on 0.85-90 per cent as against a 1.75 per cent repo cut since January, 2015. He maintained that the outlook for inflation calls for close ‘vigilance’ to ensure it remains nearer to the 4 per cent target.