Finance Minister Arun Jaitley today expressed hope that the Reserve Bank will keep in mind the decline in retail inflation while deciding on interest rates at its policy review meeting on October 4. “I expect when the policy review takes place next month then RBI, and hopefully if MPC is constituted by then, they will collectively keep all these factors in mind,” he said when asked if declining inflation leaves room for rate cut.
RBI is a responsible organisation, Jaitley said, adding, “we should wait for its judgement and we should trust its judgement”. In its monetary policy review last month, RBI maintained status quo on key rates citing upside risks to 5 per cent inflation target for March 2017. Retail inflation eased to a five-month low of 5.05 per cent in August.
The cooling of retail inflation and 2.4 per cent contraction of factory output in July has revived hopes for a rate cut by RBI in its next policy meet on October 4 to boost growth. Moving towards the new regime, the government had in July notified 4 per cent inflation target for the next five years, based on which the monetary policy committee (MPC) would take its decisions going forward.
It also provides for a margin of plus or minus 2 per cent in this target, thus fixing the upper tolerance level at 6 per cent till 2021. MPC will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.
Out of six members of MPC, three will be from RBI – the Governor, who will be the ex-officio Chairperson, a deputy governor and an executive director.
The other three members will be appointed by the central government on the recommendations of a search-cum-selection committee, headed by the Cabinet Secretary. Government is yet to name its nominees on MPC.