RBI’s new MPC cuts rate at first meeting

Debate was “frank, often intense, but always friendly” says governor Urjit Patel, after monetary policy committee votes unanimously for a cut
Reserve Bank of India in Mumbai
The Reserve Bank of India in Mumbai. Photo: RBI
Photo: RBI

The Reserve Bank of India's freshly formed monetary policy committee voted to cut the policy rate at its first meeting today (October 4).

Three internal and three external members all voted in favour of the 25 basis point cut, which brings the RBI's main repo rate to 6.25%. Inflation in August was a fraction over 5%, above the 4% target but within the plus or minus two percentage point tolerance band.

During a press conference, the RBI's governor Urjit Patel highlighted the "outstanding pedigree" of the central bank's new policy committee. Three external members, Chetan Ghate, Pami Dua and Ravindra Dholakia are all academics, while the three internal are deputy governor R Gandhi, executive director Michael Patra, and Patel. The governor gets the casting vote if there is a tie.

Patel told reporters there had been a "frank, often intense, but always friendly" process of presentations, discussions and drafting of statements during the course of the meeting. The external members brought "value and a dispersion of opinion", he added.

Explaining the rationale for the cut, the committee said inflation is likely to be held down by a good monsoon, with estimates of food production hitting record levels. Meanwhile, government action to reduce supply bottlenecks will also reduce inflationary pressure.

Nevertheless, risks are tilted to the upside, the committee added, with the potential for higher costs from rent and minimum wage increases.

A challenge for the RBI is the global slowdown of advanced economies and some major emerging markets, including China. The MPC's statement warned of a rise in protectionism and associated contraction in global trade. "Inflation remains subdued in advanced economies and has started to edge down in emerging markets," it said.

Patel pointed to a combination of risks on the horizon, saying he will be "surprised" if the International Monetary Fund does not downgrade its growth outlook during its meetings this weekend. The actions of "systemic central banks" and the outcome of the US elections pose further threats, he added.

Nevertheless, India is expecting a surge in growth from the effects of the monsoon, and higher demand resulting from pay increases. Monetary policy should support a "revival" of credit, the MPC said, even as the central bank works to clean up bank balance sheets.

In a further step towards aligning itself with monetary policy practices at other major central banks, the RBI published a monetary policy report alongside its policy statement today.

Staff projections suggest inflation will ease further in the medium term, reaching 4.5% by the fourth quarter of the 2017–18 fiscal year, which ends on March 31, 2018.

The report's authors noted the 4% target partly reflects the benefits of a higher target in the face of the "secular decline" in the real interest rate, while the wide tolerance band will give policy-makers the room to react to "large adverse shocks".

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