Inflation worries trump lone vote to boost growth, highlights RBI MPC’s minutes

Mumbai: A potential slowdown in the core sectors of the economy and a win in the protracted and attritional war over inflation were the arguments incoming member of the monetary policy committee (MPC), Nagesh Kumar, used to seek a rate cut during the early October review, where the six-member panel voted 5:1 to maintain status quo despite an unexpectedly oversized reduction in US policy rates mid-September.

Other MPC members of the Reserve Bank of India (RBI) expressed concerns over the current global and domestic economic uncertainty, underscoring the need to remain vigilant about food inflation and sustained growth. This made the case for keeping the repo rate unchanged, showed the minutes of the last MPC review published Wednesday by the central bank.

“Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic as well as export markets is flagging, a rate cut could help to revive demand and help boost private investment,” said Nagesh Kumar, director of the Institute for Studies in Industrial Development, defending his first vote as MPC member. “I think that it is an opportune moment for RBI to start the process of normalizing the monetary policy,” said Kumar, the lone member to seek a cut in rates.

Nevertheless, among those who voted for a pause, deputy governor Michael Patra said that the second-quarter slowdown could be temporary, attributing it to “idiosyncratic factors like unusually heavy rainfall in the retreat of the southwest monsoon and pitrupaksha”.

In the October 6-9 policy statement, five out of the six members voted to keep the repo rate unchanged at 6.50% for the 10th consecutive bi-monthly meeting of the MPC. All six members unanimously voted for a change in stance to ‘neutral’ from ‘withdrawal of accommodation’.

“The change in stance to neutral provides space to watch out for the uncertainties on the horizon – ranging from heightened geopolitical tensions, volatile commodity prices and risks of adverse weather in food inflation,” said RBI Governor Shaktikanta Das. “At this stage of the economic cycle, we cannot risk another bout of inflation. The best approach now would be to remain flexible and wait for more evidence of inflation aligning durably with the target,” he said.The committee is taking a gradual wait-and-assess approach, as reducing restraint too quickly may negate the progress made on disinflation. Enterprises also expect demand conditions to pick up for manufacturers, services and infrastructure.With the consumer price index (CPI) expected to be higher, the confidence of CPI coming to the target of 4% in the near future comes from the household inflation expectations survey which has been lower in the latest print, according to the minutes.