The subdued prices of vegetables and fruits in summer, when prices normally tend to escalate, gave comfort to Reserve Bank of India (RBI) governor Urjit Patel to hold on to rates, but the higher oil prices forced him to change the stance from neutral to calibrated tightening.

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The RBI kept the policy repo rate unchanged.

"We are not obliged to increase the rate at every policy meeting," Patel said in the Monetary Policy Committee (MPC) meeting.

The minutes of the MPC reveal that all the three members from RBI – governor Urjit Patel, deputy governor Viral Acharya and executive director Michael Patra – wanted a change in the monetary policy stance from neutral to calibrated tightening. Among the external members, academic Pami Dua also voted for a calibrated tightening.

RBI governor reasoned that the change in the central bank's stance is due to the rising international oil prices that pose a challenge to inflation. He said in the current rate cycle "rate cuts are off the table".

RBI had maintained a status quo in its October policy after two consecutive rounds of rate hikes of 0.25% each.

"Calibrated tightening" means that in the current rate cycle a cut in the policy repo rate is off the table, revealed the minutes of the meeting which was released on the RBI website last week.

Michael Patra, an inflation hawk who batted for a rate hike in most earlier MPC meetings, justified the change in policy stance due to the tight corporate finances. "It is only a matter of time before firms pass through the heightened input costs more aggressively into selling prices," Patra said.

Most members were also influenced by the inflation expectations of both households and professional forecasters, which are market participants such as foreign banks, which expected inflation to come down and see the pass-through impact of the 0.50% rate hike that RBI undertook during the financial year (April and June 2018).

Headline inflation adjusted for the estimated impact of house rent allowance for central government employees, moderated significantly from 4.6% in June 2018 to 3.8% in July 2018 and further to 3.4% in August, reversing the trend of the previous three months.

Patel said that food inflation continued to surprise on the downside, declining sharply from 3.1% in June to 0.9% by August in the absence of a seasonal pick up in prices of key vegetables and fruits in summer months. "Inflation in items other than food and fuel also moderated mainly due to softening in housing, clothing and transportation," Patel said.

Ravindra Dholakia said the headline inflation projection by RBI is on the higher side.

"The impact of minimum support price revision on inflation is unrealistically high in my opinion," said Dholakia, while voting for a status quo.

COOLING DOWN

  • 3.4% – Headline inflation moderated to in August  
  • 4.6% – Inflation in June 2018 and 3.8% in July