The Reserve Bank of India’s monetary policy committee wants more evidence that inflation has sustainably fallen below its target before deciding whether to lower interest rates, minutes from its last meeting showed on Wednesday. The RBI voted 5-1 to keep the repo rate at 6.25 percent earlier this month, but issued a slightly less hawkish statement after consumer inflation eased to 2.99 percent in April, below its 4 percent target. Ravindra H. Dholakia, a professor who is one of three non-RBI members, was the lone dissenter, voting to lower the repo rate by 50 basis points by strongly arguing that inflation had eased enough to justify a rate cut. The vote marked the first non-unanimous decision in the five meetings since the MPC was formed last September. However, the rest of the panel, including Governor Urjit Patel, wanted more evidence that inflation would ease, while expressing concern that prices would accelerate later this year.
“Considering the high uncertainty clouding the near-term inflation outlook, there is a need to avoid premature policy action at this stage,” Patel said, according to the minutes.“There is also a need to be alert to elements that may have a significant influence on the inflation outcome over the medium-term.” The RBI’s caution contrasts with the views of some investors and government officials, who want monetary stimulus to boost an economy that grew a slower-than-expected 6.1 percent in January-March. Such calls were given further impetus as data after the RBI’s June 6-7 meeting showed inflation easing further to 2.18 percent in May, the lowest in at least five years. That would place it at the lower end of the RBI’s projection of 2 to 3.5 percent in April to September. India will post one more inflation data next month before the next policy meeting on Aug. 1-2.
MPC members acknowledged positive factors such as easing crude and commodity prices, but reiterated concerns on risks such as elevated inflation expectations and core inflation, in line with its June statement. Scheduled government pay hikes, increases in minimum purchase prices for agricultural products and higher spending because of loan waivers to distressed farmers were other risks to inflation cited by MPC members. The RBI in June projected inflation could accelerate to 3.5 percent to 4.5 percent in October-March, potentially above its 4 percent target. However, Dholakia, known for his dovish views, dissented strongly, arguing inflation would continue to ease because of factors such as good rainfalls, and wanted to focus on boosting employment and reducing poverty. “Becoming too overcautious under such circumstances is against the principle of prudence,” Dholakia said. “I, therefore, strongly plead to the MPC to effect a 50 basis points cut in the policy rate without losing any time.”