RBI monetary policy panel’s unanimous concern on inflation

Mumbai, Feb 22 (IANS) While the RBI's six-member monetary policy committee (MPC) was unanimous in its concern about inflation when holding rates in February, four of them backed the need to shift the central bank's policy stance to "neutral" from "accommodative", the minutes of the MPC meeting released on Wednesday showed.

The Reserve Bank of India at its sixth and final monetary policy review of the fiscal earlier this month kept its short term lending rate for commercial banks unchanged at 6.25 per cent, while changing its policy stance from "accommodative" to "neutral".

"While pursuing 4 per cent CPI (consumer price index) headline inflation, it is necessary to adopt a calibrated approach so as to minimise the collateral costs of achieving the target as well as ensure its durability," said RBI governor Urjit Patel as per the minutes released.

"By shifting the stance of monetary policy from accommodative to neutral, there will now be sufficient flexibility to move the policy rate in either direction, depending on future data outcomes and projections, to help ensure that inflation is brought closer to 4 per cent," he said.

The two other RBI members on the committee - Viral Acharya and Michael Patra - agreed with the Governor's view in their statements.

"A change of stance from accommodative to neutral at this stage is desirable. It can impart the necessary flexibility for the monetary policy in future to respond to any development on either side," said another panel member Ravindra H. Dholakia.

The other two members - Chetan Ghate and Pami Dua - made no mention of the decision to move to a neutral stance.

Addressing reporters here following the policy review on February 8, Patel had said the decision to hold rates was taken in context of the "highly uncertain conditions" created by the impact of demonetisation.

"I think this (change of stance) is mainly driven by a concern about global inflation which is picking up on fuel and metal side. This could also be a risk coupled with the strengthening of dollar and it could feed into significant inflation for our economy," Deputy Governor Acharya said.

Acknowleding the impact of demonetisation, the RBI also lowered economic growth estimate for the current fiscal to 6.9 per cent from 7.1 per cent projected earlier.

MPC members were unanimous in the decision to keep the policy rate unchanged, with all six citing concerns that inflation could quickly accelerate and threaten the RBI's medium-term target of 4 percent.

"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth," the RBI policy review statement said.

Noting that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September, RBI said: "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."

"It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path -- the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission."

The average level of retail inflation in 2015-16 was at 4.9 per cent.

The MPC members also noted that global trade remains subdued due to an increasing tendency towards protectionist policies and heightened political tensions.

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