RBI governor Urjit Patel-led Monetary Policy Committee (MPC) kept the key repo rate unchanged in the first monetary policy review of 2017 and after Budget 2017. Interestingly, the committee said it decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.
“The Committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects,” the policy statement said.
On the growth front, RBI said, “Growth is expected to recover sharply in 2017-18 on account of several factors. First, discretionary consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17. Second, economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, is expected to be rapidly restored. Third, demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand. Fourth, the emphasis in the Union Budget for 2017-18 on stepping up capital expenditure, and boosting the rural economy and affordable housing should contribute to growth. Accordingly, GVA growth for 2017-18 is projected at 7.4 per cent, with risks evenly balanced.”
In a surprise move, the RBI had kept the repo rate unchanged in the fifth bi-monthly monetary policy statement for 2016-17 on December 7, while it had cut the repo rate by 25 bps in the October 4 policy review in 2016, which was the first rate cut by Patel as the Governor.
MPC or the Monetary Policy Committee is the new framework under which the RBI’s credit policy is decided. The MPC is a six-member committee, of which three members are from the RBI, and the other three are appointed by the Central government. The central bank’s monetary policy is a complex instrument that is meant to strike a balance between several economic indicators such as inflation, growth, exchange rate, and employment among others. Given the crucial task at hand, leaving the monetary policy decision making process in the hands of a single individual sometimes invites severe criticism. Globally, many central banks have therefore adopted the idea of an MPC, hence distributing the decision making power in the hands of a group of experts, instead of only the governor.