A normal monsoon for the second consecutive year and limited immediate risk to inflation from demand pressures provided room for monetary policy easing, according to Reserve Bank of India governor Urjit Patel, the minutes of the sixth Monetary Policy Committee meeting showed. However, Patel remained cautious about risks to inflation due to increase in house rent allowance (HRA) for central government employees and implementation of farm loan waivers by state governments and retained the monetary policy stance as neutral.
The RBI cut its key repo rate by 25 basis points to 6% earlier this month. While Patel, deputy governor Viral Acharya, Indian Statistical Institute professor Chetan Ghate and Delhi School of Economics director Pami Dua voted for a 25 basis points cut in the repo rate, Indian Institute of Management, Ahmedabad professor Ravindra Dholakia voted for a 50 basis point cut and RBI executive director Michael Debabrata Patra voted for status quo. “First, disentangling recent disinflation in terms of relative roles of structural and transitory drivers remains a challenge. Second, HRA will push up the inflation trajectory,” Patel had said.
“While the frontloaded expenditure by the central government so far during the year has provided a boost to the economy, the implementation of farm debt waivers by the state governments has significantly increased the fiscal risks and poses an upside risk to the inflation outlook,” he had added.
Patel had said that while transmission has improved, there is still some space for banks to cut their lending rates, especially on the existing loan portfolio. Resolution of stressed balance sheets of banks will remain important for reviving credit demand and the investment cycle, he had said. “Together with easing of underlying inflation and given that our 12-month ahead inflation forecast (excluding the HRA impact) is in line with the mandated target, there seems some room for monetary policy accommodation. Hence, I vote for a policy repo rate cut by 25 basis points while retaining the neutral stance,” Acharya had said, according to the minutes of the meeting.