Inflation, fiscal woes led to status quo, says MPC

The central bank’s Monetary Policy Committee (MPC) once again saw an internal split of 5-1 on holding rates or cutting repo in order to boost growth.

MUMBAI: The central bank’s Monetary Policy Committee (MPC) once again saw an internal split of 5-1 on holding rates or cutting repo in order to boost growth.
While five members favoured status quo citing inflation worries and fiscal woes, external member Ravindra Dholakia pitched for a rate cut to spur growth. In the end,  however, the MPC chose to hold the benchmark repo at a seven-year low of six per cent.

“For keeping headline inflation close to four per cent on a durable basis, it is important to recognise  near- and medium-term risks to the inflation outlook,” said RBI governor Urjit Patel, according to the minutes of the MPC made public on  Wednesday.“We have to be vigilant on account of uncertainties on the  external and fiscal fronts. This calls for a cautious approach,” he  said. According to Patel, structural reforms hit growth in the short-run,  but was expected to boost medium and long-term growth prospects, while  the clean-up of bank balance sheets will remain crucial to revive investments.

But, Dholakia argued that rates be reduced at least by 40 basis points (bps) to stem the slowdown. “We  also need to recognise explicitly the cost of sacrificing output growth  in terms of unemployment and poverty when inflation situation is  practically under control in the near to medium-term,” he said.
GDP growth slowed to a three-year low of 5.6 per cent during the June quarter, compelling stakeholders to call for a rate cut. But, what matters more to the central bank is headline inflation, which steadied to 3.28 per cent. RBI is duty-bound to maintain inflation at four per cent for the full fiscal, with a deviation of two per cent on either side.

“Current  inflation developments and, in particular, deviations of outcomes from  forecasts are shaping the future path of inflation in an ongoing error  correction,” MPC member Michael Patra said. He agreed to keep status quo as long as inflation stays below four per cent.
Meanwhile, Chetan Ghate said fiscal constraints may spike inflation. “A relaxation of end-year  fiscal deficit targets if tax revenues take a hit due to GST-related  disruptions also poses an upside risk to the medium-term inflation  target,” Ghate said.

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