1. As inflation climbs, forget a rate cut. Will RBI raise interest rate instead?

As inflation climbs, forget a rate cut. Will RBI raise interest rate instead?

Michael Debabrata Patra had suggested that the rate-setting panel should be prepared to increase rates to "quell the underlying drivers of inflation" if they strengthen further.

By: | Updated: November 14, 2017 5:05 PM
rbi policy, monetary policy, credit policy, rbi monetary policy live, rbi repo rate, repo rate cut, repo rate, rbi policy review, monetary policy review, home loans, rbi highlights Michael Debabrata Patra suggested that the rate-setting panel should be prepared to increase rates to “quell the underlying drivers of inflation”. (Image: PTI)

The October inflation has surged to 3.58% from previous month’s 3.28%, driven by higher food and fuel prices, while analysts expect the Reserve Bank of India to hold rates in the upcoming monetary policy meeting on December 6, the Central Bank may even increase rates to thwart the rising inflation to keep it within the 4% target. In the last monetary policy meeting on October 3-4, five out of six members voted to keep the repo rate unchanged but Michael Debabrata Patra suggested the rate-setting panel to be prepared to increase rates to “quell the underlying drivers of inflation” if they strengthen further.

According to the minutes of the meeting, Michael Debabrata Patra was among five members who voted to keep the repo rate unchanged, along with Chetan Ghate, Pami Dua, Viral V. Acharya and Urjit R Patel. “I… vote for status quo, but only as long as inflation readings stay 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,” Michael Debabrata Patra had said. Only Ravindra H Dholakia who suggested a 40 basis point cut while others, including RBI governor Urjit Patel, maintained a cautious stance and voted to not change the repo rate.

“For keeping headline inflation close to 4 percent on a durable basis, it is important to recognize near and medium-term risks to the inflation outlook. We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach,” Urjit Patel had said.

While the food inflation is likely to subside in November, fuel prices may keep the inflation high. Besides, the rising in food prices in vegetable, milk, and milk products, the fuel (LPG price hikes for non-subsidized cylinders) and housing prices appear to contribute to rising inflation in short-term to medium-term,” Dinesh Kumar Nayak, Economist at National Institute of Public Finance and Policy said.

The central bank had kept the policy stance neutral with the objective of limiting the medium-term target for consumer price index (CPI) inflation of 4% within a band of plus/minus 2%, while supporting growth in its last monetary policy meet. The RBI had expressed concern over fiscal slippage, crude oil prices and global geopolitical escalation.

According to DBS Group, the RBI is likely to keep rates on hold in December and for the rest of the current fiscal year. “The likelihood of inflation testing the 4% target by late 2017 and staying above it in the March 2018 quarter reinforces that the Reserve Bank of India will remain on hold in December and the rest of FY18,” DBS Group said.

The RBI’s meeting minutes, which revealed diversity in the opinions of the monetary policy members, on the basis of which Japanese brokerage Nomura suggested that there will not be a cut in the December policy as well, unless the Q2 growth numbers surprise, PTI reported. “The divergence in views of Dholakia and Patra remains intact with the former seeing space for a 40 bps rate cut owing to very high real rates, while the latter voting for a pause, but stated that the MPC must be ready to raise rates if needed,” the report noted.

(First published on October 20, 2017, on www.financialexpress.com)

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