Inflation to soften on good rains, economic revival visible: MPC

The Reserve Bank of India (RBI) has released the minutes of the first meeting of the six-member Monetary Policy Committee (MPC) on October 3 and 4. The minutes showed that while all the members favoured a cut in repo rate by 25 basis points, they also felt inflation would soften in the days to come on back of good monsoon. The outlook for economic expansion also seemed to be better with signs of revival, the members felt.

According to the minutes, the members were of the opinion that the rate cut was in line with the target to keep retail inflation within a band of four per cent, plus or minus two percentage points, while supporting growth.

The members felt growth momentum would improve with monsoon boosting agricultural growth and rural demand, and also by the stimulus to the urban consumption spending from the Pay Commission’s award.  

The accommodative stance of the monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors, the minutes added.

Referring to evolving inflation trajectory, MPC member Ravindra Dholakia said some of the upside risks to inflation discussed in the MPC meeting, particularly arising out of the award of the 7th Pay Commission, were “largely statistical”. Looking forward, the probability of inflation turning up from the current level was reasonably less, he added.  

Another member, Pami Dua, a faculty member at the Delhi University, said the Consumer Confidence Survey presented an encouraging outlook for the price scenario as well as future economic conditions.

While Industrial Outlook Survey suggested some increase in input price pressures in the manufacturing sector in the short-run, this would not transmit to higher selling prices, she said.

Chetan Ghate, faculty member at Indian Statistical Institute, said expectations of future inflation at the monetary policy horizon were closer to the inflation target, which was also expected to contribute to low and stable inflation.

While commenting on economic growth path, Dholakia said the potential growth path of the Indian economy was gradually moving up, particularly in response to several reform measures. According to him, there is substantial under-utilisation of capacity in the system and there is no major risk to inflation if the output gap closes fast.

Ghate said there were signs of revival of economic activity, which should be nurtured.

Seconding his views, Dua said lacklustre private investment spending and unused capacity provided a window for a reduction in the policy rate.

RBI governor Urjit Patel said while the central bank’s model-based projections indicated upside risks to the target, a calibrated policy judgment was warranted, given that some space for policy action had opened up with the fall in inflation in the August reading.

“Nonetheless, inflation outcomes in the fourth quarter will have to be carefully and continuously monitored as upside risks, albeit lower now than before, persist,” the governor said.

According to the minutes, RBI Deputy Governor R Gandhi said the risks to India’s growth from a still-fragile global economy have increased, particularly through the trade channel. However, risks to inflation from global factors might be easing, going by the observed high intensity and spread of global disinflation.

RBI Executive Director Michael Debabrata Patra said several parts of the economy were languishing, but other parts such as agricultural activity, steel production, public investment in roads, railways and inland waterways were mending and coming together for a potential revival.

The next meeting of the MPC is scheduled for December 6 and 7. Retail inflation based on Consumer Price Index in September dropped to 13-month low of 4.31 per cent, mainly on account of easing vegetables prices, creating headroom for further rate cut by the Reserve Bank in the coming months.

NOTES FROM RBI

• RBI released MPC minutes on October 3,4
   
• According to the minutes rate cut was in line with the target
   
• It tries to keep retail inflation within a band of 4%, while supporting growth
   
• Retail inflation dropped to 4.31%
   
• It was mainly on account of easing vegetables prices
   
• The next meeting is scheduled for Dec 6 and 7