RBI advisory panel suggested status quo on policy

The central bank, was expected by the analyst community, kept the policy repo rate unchanged at 6.5%

Four of the five external members in the advisory panel on monetary policy suggested status quo in the third bi-monthly monetary policy review of the Reserve Bank of India (RBI), held on August 9.

One member recommended a reduction of 50 basis points in the policy rate, reasoning that there was a “high probability of inflation softening to 4-5 per cent by the year end”, an appreciation in the real effective exchange rate and increased interest differential would slow recovery of large corporate, a summary of the electronic consultation with the technical advisory committee showed. The summary is available on the RBI website. The central bank kept the policy repo rate unchanged at 6.5 per cent.

Members who advised status quo were of the view that retail and food inflation, which saw recent upticks, and other price indicators continued to be sticky. Elevated food inflation might have effects on headline inflation if it remains persistently above. “Although industrial growth remains weak, the improvement in liquidity conditions should help banks pass through past policy rate cuts,” the members opined, but expressed concern that the implementation of the goods and services tax posed an upside risk to inflation.

According to the members, inflation excluding food and fuel showed some signs of the anchoring of inflation expectations that needed to be further strengthened by keeping the policy rates unchanged. In this situation, the real policy rate continued to be below the natural rate and, therefore, there was no space for accommodation unless there was substantially lower inflation relative to the target of five per cent for March 2017 on a durable basis.

Inflation for July came at more than six per cent, much above RBI’s comfort zone.

All the five external members – Shankar Acharya, Arvind Virmani, Errol D’Souza, Ashima Goyal, and Chetan Ghate – sent their feedback through e-mails.