M Patra pushed for rate hike at RBI's monetary policy review meet

But minutes of meeting show executive director voting for status quo

At its review of monetary policy earlier this month, the central bank's decision-making panel formally voted unanimously to keep rates unchanged but, before that, one member had urged the case for an increase.

Giving primacy to tackling inflation concerns, M Patra, executive director at the central bank and member of the Monetary Policy Committee (MPC), wanted a pre-emptive 25 basis points (bps) rise in the policy rate.

The minutes of the meeting, issued on Thursday, show all six members — three external and three from RBI — voting for the status quo. In the February review, the decision was to change the policy stance from 'accommodative' to 'neutral'. The panel met again on April 5 and 6; it decided to continue with a neutral stance. It had cut the repo rate by 175 bps from January 2015.

Patra had, however, earlier recommended staying ahead of the inflation curve. “I believe a pre-emptive 25 bps increase in the policy rate now will point us better at the (inflation) target of four per cent to which the Committee has committed explicitly. It will also obviate the need for back-loaded policy action later, when inflation is unacceptably high and entrenched,” he'd said, according to the minutes.

Patra, also with responsibility at the monetary policy department of RBI, said: “True to projections made at the time of the last meeting of the Committee, inflation is turning up. It seems to me that it is coming out of the U-shaped compression imposed by demonetisation and is now positioned on a rising slope. Several factors merit pre-emptive concern.”

Urjit Patel, the RBI chief and also on the MPC, said the outlook for inflation faced several other risks. Input costs had been rising, which could be passed on to output prices as demand strengthened. Further risk were implementation of the House Rent Allowance recommended by the pay commission for government staffers and the coming national goods and services tax. These could alter the inflation turn in 2017-18.

He also pointed to uncertainty about the crude oil price trajectory. And, heightened geopolitical risks continue to impart financial volatility in global markets, the governor had said.

Ravindra Dholakia, member and a professor at the Indian Institute of Management, Ahmedabad, said with the surplus liquidity (after demonetisation) in the system, any change in the policy rate was not desirable at this stage. The liquidity position was expected to return soon to the normal level consistent with the neutral stance.

Viral V Acharya, deputy governor and looking after monetary policy, said with the balanced nature of risks and uncertainty that abound, “I lean towards continuing the neutral stance and pause” for now.

He'd wanted the central bank to focus on important issues like resolving of banks' stressed assets and correcting weak bank balance-sheets; also, more durable mopping of surplus liquidity still around after demonetisation. Such liquidity was keeping short-term money market rates away from the policy rate.

Unleashing the potential of capital markets further, by enhancing liquidity in the corporate bond market, and improving the ease and suite of financial hedging options also merited attention, Acharya had said.