The Reserve Bank of India (RBI) released Minutes of the Monetary Policy Committee (MPC) meeting held on 3rd and 4th October 2016. As per the minutes and individual statements, external members on the Committee appear relatively dovish, while those from RBI seems to be guarded on the inflation front, which is more or less expected from the central bank members, says a report.
In a research note, Religare Capital Markets Ltd, says, "A unique aspect of the minutes was that individual member views were communicated separately. However, there was no explicit guidance on their future stance or any commentary on real neutral policy rate that they would seek and the timeline to meet the medium term consumer price index (CPI) inflation target of 4%. The MPC members expect growth to pick-up with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award."
The six-member committee has RBI Governor Urjit Patel as chairman and the central bank's Deputy Governor R Gandhi and Executive Director Michael Patra, as the institution's representatives. The three outside experts are Dr Chetan Ghate, Professor at Indian Statistical Institute; Dr Pami Dua, Director at the Delhi School of Economics; and Ravindra Dholakia, Professor at the Indian Institute of Management, Ahmedabad.
During the MPC meeting, all members unanimously decided to cut repo rate by 25 basis points (bps).
According to Religare, the members from outside RBI were relatively dovish, which is evident from their individual statements, in the minutes.
Dr Ghate indicated that both cyclical and structural risks to the March 2017 CPI inflation target had abated on the back of a good monsoon, decline in food inflation and better food supply management by the government, even as he highlighted concerns around the persistence of core inflation. He stated, “inflation expectations, based on the Survey of Professional Forecasters, were closer to the inflation target, which was expected to contribute to low and stable inflation.”
Dr Dua also highlighted that inflation expectations were anchored based on the Survey of Professional Forecasters. She said that the RBI’s Industrial Outlook Survey suggests some increase in input price pressures in the manufacturing sector in the short term, though this is not expected to transmit to higher selling prices.
Dr Dholakia from IIM-A observed that upside risks to inflation arising out the 7th Central Pay Commission (CPC) payout were largely statistical and there is a good chance for inflation to ease further substantially, benefiting from a good monsoon, the government’s supply management measures, and ongoing reforms gaining traction in terms of reducing costs and improving output response.
On the other hand, Religare says, the nominees from RBI were relatively guarded on the inflation front, which was more or less expected from them. Dr Patra stated that although inflation momentum had collapsed, particularly in essential food items and the Q4FY17 target seems to be achievable, it was crucial to step up vigil around the upturn in inflation projected in Q4FY17.
Dr Gandhi viewed significant comfort on the food inflation front, coming from a sharp rise in pulses output. However, he believed that government supply response and supply management will remain critically important to influence the space for monetary policy actions.
The RBI governor Dr Patel also explicitly stated that the inflation target of 5% for Q4FY17 is likely to be achieved, even as upside risks persist.
Religare says it expect inflation to undershoot RBI's projection for FY2017. Given this and the tweaks in parameters instituted by the new RBI governor and the MPC in the October Monetary Policy meeting, Religare believes that there is room for another 25bps cut in the remaining part of FY17.
"However," it added, "we believe medium-term upside risks to inflation remain and the journey to the RBI’s Q4FY18 estimate of 4.5% would be a difficult one. It would be affected by the implementation of the housing allowances portion of the 7th CPC, GST implementation , rising global commodity and oil prices, stickiness in core inflation and the US Fed’s rate hike timeline and financial and currency market response, and the impact on imported inflation via currency depreciation."