India’s monetary policy-makers disagreed sharply over whether the economy needed another dose of stimulus, underlining their dilemma as growth slowed with inflation forecast to accelerate. While five on the six-member monetary policy committee voted to keep the key policy rate unchanged this month, one member said the Reserve Bank of India must be ready to tighten while another said August’s 25 basis point cut was too little and too late. Governor Urjit Patel, his deputy Viral Acharya, and Pami Dua said recent indicators have been volatile and more data is needed to ascertain the magnitude of risks, according to minutes of the Oct. 3-4 meeting published Wednesday.
Credibility Tested
“The credibility of the MPC will be tested in the months ahead,” said Michael Patra, the most hawkish member of the group. Data released after the RBI’s decision showed inflation unexpectedly steadied at 3.3 percent in September from a year earlier. The monetary authority had raised its inflation forecast to a range of 4.2 percent to 4.6 percent for October-March, higher than its 4 percent medium-term target and the previous projection of 3.5 percent to 4.5 percent. It also lowered the estimate for gross value added — a key measure of growth — to 6.6 percent for the year through March 31, 2018, from 7.3 percent, keeping alive speculation that it could cut rates later this year. Gross domestic product had slowed to a three-year low in the April-June quarter, slugged by the government’s cash ban and ahead of a new goods and services tax. The repurchase rate was left at a seven-year low of 6 percent.
Manufacturing Uncertainty
“The implementation of the GST has rendered prospects for the manufacturing sector uncertain in the short-term,” Patel said. “This may further delay the acceleration in investment activity. However, there is a need for more data to assess whether the recent headwinds in overall GDP growth prints are transient or sustained.” Acharya said given the central bank’s inflation outlook “has risen quite some distance over the target of 4 percent, there did not seem much room for monetary policy adjustment.” Patra said the RBI should be ready to raise interest rates if inflation breaches 4 percent. “The minutes revealed an intense debate on the growth and inflation outlook and appropriate policy response — but did not suggest a bias towards easing,” Morgan Stanley economists including Derrick Kam wrote in a report.
There was one MPC member who called for a steep cut. Arch-dove Ravindra Dholakia argued that there was enough slack in the economy and inflation would rise only marginally, leaving enough room for more cuts. “In my view, the policy rate should have been cut by 50 basis points long back in June 2017,” Dholakia said. “A cut of 25 basis points in August was too small and too late.” The minutes were published after the market was shut on Wednesday and the foreign-exchange and bond markets will be closed Thursday and Friday for local holidays. The yield on benchmark 10-year government debt has risen 10 basis points this month.
MPC MEMBER OCTOBER AUGUST Patel (slight hawk) “For keeping headline inflation close to 4 percent on a durable basis, it is important to recognize near and medium-term risks to the inflation outlook. We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach” “Present low level of food prices is unusual and is vulnerable to upward pressures” Acharya (hawk) “Given our inflation outlook has risen quite some distance over the target of 4 percent, there did not seem much room for monetary policy adjustment” “Growth slowdown… is rooted in the stressed balance-sheets of our banks and corporates” Dua (middle) “In the current scenario, a wait and watch strategy is recommended with continuous monitoring of data to distinguish between a temporary effect and a long-lasting, structural impact” “Continuous monitoring of incoming data is required to ascertain the extent to which the recent (inflation) softening is durable” Dholakia(uber-dove) “We can still make the additional cut of 25 bps now if we want to be extremely cautious. Otherwise, my opinion is that we have a space for a cut of about 40 bps at present with due consideration to any possible upward risk to future inflation” “Neutral policy stance needs to be seriously reconsidered in favor of the accommodative stance” Ghate(middle) “With a roughly 200 basis points increase in headline inflation in the last two months, and with the acceleration of inflation excluding food and fuel to 4.6 percent from 4.1 percent, upside risks to the medium term inflation target of 4 percent have again come to the fore” “While a significant decline in both headline inflation and inflation excluding food and fuel provides reason for cautious optimism, it remains unclear at this juncture whether these outcomes will sustain durably in the future” Patra(uber-hawk) “It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further” “Why not stay on hold now, watch the shape and slope of the upturn and if it is benign, deliver credible monetary policy that supports the economy?”
