Lack of alternatives drove RBI's Monetary Policy Committee towards rate hike

The panel, which saw split verdict in the past meetings, has unanimously agreed to hike policy rates this time, simply because ‘there was no alternative.’

Published: 21st June 2018 02:56 AM  |   Last Updated: 21st June 2018 06:47 AM   |  A+A-


Image of RBI logo for representational purpose only. (Photo | Reuters)

By Express News Service

MUMBAI: Rising prices forced its hand on Reserve Bank of India’s Monetary Policy Committee (MPC) to take its foot off the policy pedal and hike benchmark rates earlier this month, show the minutes of the MPC meeting released Wednesday.

The panel, which saw split verdict in the past meetings, has unanimously agreed to hike policy rates this time, simply because ‘there was no alternative.’

Considering the uncertainties over oil and food prices, besides other volatile macro indicators like a potential trade war, the MPC, stuck to its neutral stance, which Patel said will allow the committee to move in either direction (to cut or increase rates).

The 25 bps raise, which came after a four-year hiatus, increased the repo rate to 6.25 per cent, but it’s ambiguous if the central bank has embarked on a rate-hike cycle yet.

“Inflation risks have increased since the April policy. I, therefore, vote for an increase in the policy repo rate by 25 basis points. In view of prevailing uncertainties, it is apposite to maintain neutral stance so as to respond to the evolving situation in a flexible manner,” noted Dr Urjit Patel, Governor, RBI.

Though the baseline inflation metric is bounded by uncertainties including the hardening global oil prices, volatility in global financial markets and the impact of the likely revision in the MSP tariffs, Patel was of the view that a normal monsoon could mitigate the risks of adverse food inflation.  

Deputy governor Dr Viral Acharya noted that the growing concern around underlying inflationary pressures in the April monetary policy review, said there has been a rise in input costs due to supply shocks like the sharp oil price surge in the past few quarters.

“There is no alternative to raising the policy rate by 25 bps so as to signal concern about underlying inflation, manage inflation expectations and guard proactively against a further increase in inflation,” he observed.

All other members including Michael Debabrata Patra, Ravindra Dholakia, Pami Dua and Chetan Ghate voted for a rate hike, with Ghate’s remarks summing up the thought process behind the decision: “The combination of cost-push and demand-pull factors at the current juncture has put one-year ahead inflation projections significantly above 4 per cent. This warrants a monetary policy response.”

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