1. RBI Governor Urjit Patel turns dovish; MPC cuts rate on global growth fears

RBI Governor Urjit Patel turns dovish; MPC cuts rate on global growth fears

In a departure from his predecessor Raghuram Rajan's inflation-focussed policy, RBI Governor Urjit Patel today steered a long-demanded rate cut despite the central bank's report raising concerns over acceleration in prices, on account of the 7th pay commission award.

By: | Mumbai | Published: October 4, 2016 7:39 PM
Patel, who was known to be more hawkish than Rajan who took inflation fight as his primary focus, said reforms undertaken by the government in the recent past have eased the supply constraints. (Source: Reuters)

In a departure from his predecessor Raghuram Rajan’s inflation-focussed policy, RBI Governor Urjit Patel today steered a long-demanded rate cut despite the central bank’s report raising concerns over acceleration in prices, on account of the 7th pay commission award.

Taking a dovish stand despite upside risks to inflation, the 6-member Monetary Policy Committee (MPC), headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, by 0.25 per cent to 6.25 per cent — lowest since November 2010.

“While there are issues related to upside risks to inflation, and we have always said the direct impact of house rent allowances (HRA) due to second round impact of the pay panel award on retail inflation will be looked through,” Patel told reporters in his maiden press conference after taking over on September 5.

“It is the highly uncertain indirect effect which we will have to wait for in terms of both how the HRA is going to be implemented and then the consequences thereon,” he added.

This is the second reduction in the rates by RBI since April and extends the easing cycle begun in January 2015. Consequently, the reverse repo rate has also come down by a similar percentage point to 5.75 per cent.

Patel, who was known to be more hawkish than Rajan who took inflation fight as his primary focus, said reforms undertaken by the government in the recent past have eased the supply constraints.

“There is large investment in the Railways and roads which will improve infrastructure. The proactive food management policy by the government has played a crucial role in the past two years and will continue to play a crucial roles in the time to come. There is improvement in the pulses supply and there has been sharp improvement in competitiveness ranking,” he said.

MPC, which met for the first time for RBI’s fourth bi-monthly monetary policy review, was set up recently to make decision-making more transparent and more collegiate. Till then, the RBI governor was taking call on rates.

The rate cut comes amidst falling consumer inflation which eased to a five-month low of 5.05 per cent in August, within the MPC’s 2-6 per cent target, and is expected to ease further following a good monsoon and record food production.

On the other hand, the Monetary Policy Report, released ahead of the policy review, said while the second round impact of the seventh pay panel award in the form of salaries and pensions is incorporated in the baseline forecast, the effect of HRA is not factored in, as its implementation was deferred.

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