Reserve Bank of India's monetary policy committee cited upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its policy rate unchanged, according to minutes of its April meeting released on Thursday.
Reserve Bank of India’s monetary policy committee cited upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its policy rate unchanged, according to minutes of its April meeting released on Thursday. The 6-member monetary policy committee (MPC) which had unanimously decided to keep the repo rate unchanged at 6.25 percent in early April, had raised a secondary rate called the reverse repo rate, which is used to drain excess funds from banks.
The MPC, which aims to bring down inflation to 4 percent in the medium term, maintained its hawkish stance on inflation, with most members expressing concern over upside risks to core inflation. One member, M. D. Patra, the executive director of the Reserve Bank of India (RBI), and in charge of monetary policy, favoured an increase in the repo rate by 25 basis points as a pre-emptive move to curb inflation pressures.
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But Patra finally agreed with the rest of the panel on holding the rate unchanged for now. “There is some uncertainty as to when the headline inflation might cross the target inflation rate of 4 percent and keep inching above, given that inflation without food and fuel is stubbornly above the target rate,” RBI Deputy Governor Viral Acharya wrote in the minutes.
Consumer price inflation rose by an annual 3.81 percent in March, the fastest pace since October 2016 with core inflation hovering near 4.9 percent. Besides core inflation, a demand pick-up on a government salary increment and reflation risk from commodities globally were the key reasons that all panel members cited for voting to keep the repo rate unchanged.
A Reuters poll of 35 economists conducted from April 10-19 showed that the RBI would keep the repo rate unchanged until October-December of 2018 and the next move would be a cut. However, on growth, the MPC reiterated its confidence of a faster recovery given that a government ban of certain bank notes in November did not hit the economy in a major way.
India posted 7.0 percent growth for the October-December period, much faster than an expected 6.4 percent rate, and even higher than China’s 6.8 percent, leaving analysts stunned with such a sharp recovery despite the so-called demonetisation exercise.