MPC held rates steady on poor transmission, CPI fears


Cogencis, Thursday, Dec 19

NEW DELHI - Members of the Reserve Bank of India's Monetary Policy Committee didn't cut the repo rate on Dec 5 due to weak transmission of past rate cuts and concerns about inflation rising further.

As per the minutes of the Dec 3-5 meeting of the rate-setting panel, which were released by the central bank today, several members expressed dissatisfaction at the extent of transmission of the 135 basis points of repo rate cuts announced in 2019.

At The Post-policy Media Briefing On Dec 5, Governor Shaktikanta Das Had Said That While There Was Room To Lower The Policy Rate Again, The MPC Had Unanimously Voted To Leave It At 5.15% As It Wanted To See The Impact Of Past Rate Cuts Play Out.

"...counter-cyclical monetary policy has not been as effective as expected due to inadequate monetary policy transmission," external member Chetan Ghate said in his statement.

"Weak monetary transmission is one of the factors that has resulted in the poor macroeconomic equilibrium the economy is currently in and it could lead to excesses in the financial sector," he added.

Banks' weighted average lending rate on fresh loans has only come down by 44 bps in response to the MPC's rate cuts in 2019.

At the post-policy media briefing on Dec 5, Governor Shaktikanta Das had said that while there was room to lower the policy rate again, the MPC had unanimously voted to leave it at 5.15% as it wanted to see the impact of past rate cuts play out.

The minutes showed other members of the committee weighed in on the matter, expressing hope that the linking of banks' lending rates to external benchmarks would expedite transmission.

" is pragmatic to wait for more clarity to emerge for a firm action on policy rate. In the meantime, the expected better transmission of the past rate cuts will serve the purpose in any case," said Ravindra Dholakia.


Though the MPC said in its statement earlier this month that there is "monetary policy space for future action", several members expressed concern about inflation rising further, including Dholakia, who was widely seen as the most dovish member of the committee.

"The forecast of inflation by RBI for the 4 quarters up to Q2 of 2020-21 (Jul-Sep 2020) is based on certain assumptions where considerable uncertainties are involved. I, therefore, take the RBI forecast of the headline inflation of 3.8% for Q2 of 2020-21 with some reservation at this point," Dholakia said.

As per the RBI's most recent projections, headline retail inflation is seen averaging 5.1% in Oct-Dec, before easing to 4.7% in Jan-Mar. In Apr-Jun, it is seen cooling further to the RBI's medium-term target 4.0%, and further to 3.8% in Jul-Sep.

Data released since the monetary policy announcement has shown Consumer Price Index inflation hit a 40-month high of 5.54% in November, driven by higher food prices.

RBI Executive Director Michael Patra warned of inflation rising from 4.62% in October in the next two or three months, which warranted a pause on easing. And though Patra expects the high vegetable prices to start reversing in Jan-Mar, he cautioned that vegetable inflation could get generalised.

"The key question is: will the upside in other food prices reverse or persist, especially those of pulses and milk? If it persists, will it spill over into non-food inflation? This too warrants close monitoring of incoming data over the next few months and, therefore, a pause," Patra said.

Ghate also seemed to hint that he may not be in favour of further rate cuts any time soon, saying that even though growth is lacklustre and inflation is rising, "monetary policy is in a good place right now".

He, however, added that he remained data dependent.

Pami Dau too said that it was "best to monitor incoming data on both inflation and growth".

Both Ghate and Dua had not referred to the MPC's October forward guidance--that it would continue its accommodative stance as long as necessary to revive growth--in any form in the minutes of the previous meeting.

The MPC is scheduled to meet next during Feb 4-6.  End

Reported by Siddharth Upasani

Edited by Ashish Shirke

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