Crude oil and commodity prices (including for food) have firmed up globally, thereby potentially raising risks to the headline inflation: Urjit Patel
All six members of the Monetary Policy Committee (MPC) unanimously agreed to hold the policy rate at 6.25% on February 8, the last monetary policy review of the financial year. Four out of the six members of the committee recommended a change in the monetary stance because they feared a rise in inflation fueled by the rise in oil prices, global commodity prices, and reversal in the food prices in India.
Majority of the members thought that the time was ripe for focusing on inflation to meet the medium target of 4%.
Urjit Patel, governor, RBI, said the past experience suggested that the rebound in vegetable prices could be sharper than normal. He added the non-food non-fuel inflation had remained sticky, notwithstanding the transitory impact of demonetization on consumption demand. "Crude oil and commodity prices (including for food) have firmed up globally, thereby potentially raising risks to the headline inflation."
Michael Patra, executive director, RBI, said, "I vote for keeping the policy rate unchanged and for starting the withdrawal from accommodation in the policy stance for three compelling reasons." He goes on to state that the food prices, fuel and international community prices which cooled the inflation is no longer visible. So a shift in stance is but necessary.
Some members expected the remonetization could lead to inflationary pressures and demonetisation had led to a fire sale of food items.
The government nominee, Ravindra H Dholakia said, "As the transitory impact of demonetization recedes and remonetization sets in, the banks' MCLRs are likely to increase marginally. Since the items affected by it in the CPI do not have high weightage, the CPI inflation without food and fuel continues to be high around 5 per cent. The decline in overall CPI inflation is not reliably stable because it is mainly on account of vegetables and pulses coupled with the transitory impact of demonetization."
Patel also raised fears of the 7th Pay Commission allowances, and exchange rate volatility arising from possible shifts in risk premia on a full rollout of US macroeconomic policies impart uncertainty to the inflation trajectory going ahead.
Global factors (higher commodity prices, the risk of protectionism, a stronger dollar, Fed balance-sheet reduction risk) also played a role in the change in stance. Ghate wanted to see more data on the demonetisation before inflicting a rate cut.
Chetan Ghate, professor Indian Statistical Institute, said, "What is a little more uncertain is the permanent effect, which will operate through wealth destruction, and work more gradually. Even so, the permanent (adverse) effect is not likely to be large in the long run. Overall, and as I mentioned in the last review, it appears that uncertainty on the production side has largely been mitigated. Since I do not see a persistent opening up of the output gap because of demonetization, this does not warrant a rate cut."
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