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MPC members voted for cut but flagged risks to inflation

Minutes released by RBI showed that members voted for an easier monetary policy.

, ET Bureau|
Jun 20, 2019, 08.06 PM IST
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Mumbai: Risks from a depreciating rupee, higher oil prices and a possible fiscal slippage are still in the minds of the members of the monetary policy committee (MPC), even though they voted unanimously only the second time to cut policy rates and change stance from neutral to accommodative.

Minutes released by the Reserve Bank of India (RBI) showed that members voted for an easier monetary policy mainly due to a slowdown in growth and falling inflation. However, some members pointed out that there is little more room for further rate cuts.

RBI deputy governor Viral Acharya pointed out the possibility of a fiscal slippage which could lead to an upside risk to RBI’s projected inflation trajectory. “Estimates of overall public sector borrowing requirement (PSBR) which appropriately accounts for extra-budgetary resources and other off-balance sheet borrowings of central and state governments have now reached between 8% and 9% of GDP. This is at a level similar to that in 2013 at the time of the “taper tantrum” crisis,” said Acharya.

Acharya estimates that even a 50 basis points fiscal slippage or a 10% increase in oil prices will leave no space to cut the policy rate below 6%. The RBI had cut the repo rate by 25 basis points to 5.75% in its monetary policy meeting on June 6. Acharya had gone against the popular vote in favour of a cut in the last policy in April but said he had voted “with some hesitation – to frontload the policy rate cut from 6% to 5.75%....(as) this would provide an insurance to help prevent the output gap from widening further or the finance-neutral output gap (FNOG) from turning negative.”

Another member, while voting for a cut in the benchmark rate pointed out the risks coming from weakness of the rupee and higher oil prices. “I continue to remain watchful of the risk that the rupee and crude will have on the trajectory of inflation ex food and fuel. Food inflation, however, will continue to normalize in the April-August period. It remains to be seen how strong the spill overs are from a cyclical seasonal movement, especially in vegetables, on inflation ex food and fuel. This should be carefully monitored,” said Chetan Ghate.

Ghate voted for a cut because it will help in both closing a widening output gap and bring back below target inflation as a “divine-coincidence.”

RBI executive director Michael Patra listed weakening demand conditions, elevated capacity utilisation, dipping consumer confidence and expectations of a moderation in private consumption, gross fixed investment, exports and imports to vote for a rate cut.

“In my view, the evolving macroeconomic configuration imparts urgency to strong policy support for the flagging economy in pursuance of the goals set for the MPC. In fact, with inflation projected to remain below target, a higher weight needs to be assigned to growth relative to previous meetings,” Patra said.
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