RBI rate panel focuses more on inflation, plays down growth worry

RBI's six-member MPC decided unanimously to keep policy repo rate unchanged at 6.25% on Dec 7

All the six members of the monetary policy committee (MPC) agreed that the repo rate should remain unchanged in the December policy. The minutes of the meeting held on December 6-7th also revealed that the MPC believes that the effects arising out of demonetisation is transitory in nature and instead one need to focus on achieving the inflation target.

"The impact of the withdrawal of SBNs on growth and inflation, while uncertain, is transitory. Against this backdrop, it is important for monetary policy to stay focused on the medium-term and strive to achieve, on a durable basis, the middle of the notified inflation target range i.e., 4%," said Urjit Patel, governor, Reserve Bank of India (RBI).

Patel also stated that the risk arising out of global financial conditions are also not showing any signs of abating. The other members of the MPC also expressed concerns over the rising global crude oil prices and other commodity prices leading to higher inflation in other economies.

The members also noted that as the monetary policy transmission by banks to consumers continues to remain low, a rate cut would not result in any immediate benefits to the consumers. As per the RBI data, despite 175 basis points cut in policy rates between January 2015-November 2016, the reduction in bank lending rate till September 2016 has been an average of only 71 basis points.

"Because of imperfect interest-rate pass through so far, an additional cut at this juncture may not yield any further transmission from banks? Once the union budget is announced in the first week of February, there will be one more data point.," said the committee report.

Another reason that led the committee to pause on the rate cut was the absence of any hard data for November and therefore the panel decided that it will be "prudent to wait-and-watch." Before the next policy on February 8th, the Union Budget will be announced which will provide more data points.

The increased uncertainty due to the withdrawal of Rs 500-1000 notes as legal tender was also another reason that the MPC decided to hold the rates.

"Given the recent developments on SBNs and related policies, the banking sector is likely to be flooded with liquidity for some time to come that on its own may exert a greater influence on the lending rates of banks than the repo rate," said one of the MPC members.