On February 7, the Reserve Bank of India decided to keep the repo rate unchanged for the third time at 6% on the concerns of higher inflation. The central bank said that crude oil prices, housing rent allowances and the fiscal slippage are putting upside risks on the inflation.
On Wednesday, the RBI released the minutes of the monetary policy meeting, which details the arguments governor Urjit Patel put forth while voting to hold the rate. According to the minutes of the meeting, Urjit Patel was worried over inflationary pressures and decided to keep policy rate on hold as the economic recovery was at a nascent stage.
“Although inflation risks have increased in recent months, incoming data should provide greater clarity about the persistence of inflationary pressures. The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture. I, therefore, vote for keeping the policy repo rate on hold while maintaining a neutral stance,” he said.
According to the statement, Urjit Patel flagged caution over upside risks to inflation — the staggering impact of HRA increases by various state governments, policy for arriving at the minimum support prices for Kharif crops, and the fiscal slippage as indicated in the Union Budget with implications on private investments.
He estimated that the crude oil prices, which were rallying then, could moderate if there is a strong supply response, but he also added that the significant rise between December and early February was worrisome. He said that the inflation in the baseline scenario is projected to remain above the target of 4% throughout 2018-19.
The RBI, in its monetary policy meeting, raised its inflation forecast for the fourth quarter of the current fiscal to 5.1%, and between 5.1% and 5.6% for the first half of the next fiscal. The suggested that the food inflation can be kept in check if the government manages effectively.
He said that the investment in the country is picking and praised the growth shown by the manufacturing sector. “There are also early signs o a revival of investment activity. Many service sector indicators have shown robust growth such as commercial vehicle sales, domestic & international air passenger traffic, and foreign tourist arrivals.”
Of the six monetary policy committee members, five including Urjit Patel voted to keep the repo rate unchanged, while Michael Debabrata Patra voted to increase it by 25 basis points.