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India cenbank policy panel cites concerns about inflation

23 February 2017 12:00 am - 0     - {{hitsCtrl.values.hits}}

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REUTERS: The Reserve Bank of India’s six-member monetary policy committee cited concerns about inflation in holding rates in February, with three mentioning the need to shift the policy stance to “neutral” from “accommodative,” minutes from the meeting showed.
The minutes were released on Wednesday, two weeks after the RBI voted 6-0 to hold the repo rate unchanged at 6.25 percent at its February 7-8 meeting, while stunning markets by changing the stance. The minutes showed widespread discomfort about retail prices among the panel members, with all citing concerns that inflation could quickly accelerate and threaten the RBI’s medium-term target of 4 percent.
Inflation had hit a two-year low of 3.41 percent in December, according to data available to panel members during its last meeting. It subsequently fell further to 3.17 percent in January, the lowest in at least five years.
But panel members believed that lower vegetable food prices were driving inflation lower, a worry given the volatile nature of food prices in India.
At the same time the members seemed confident that the economic impact of the government’s unexpected move to ban higher value bank notes would subside, although they continued to believe the RBI needed to be mindful about growth.
That pushed some members to call for a change in stance, believing it would afford flexibility to hold or raise rates should inflation accelerate, or to cut them if it subsided, the minutes showed.
“A change of stance from accommodative to neutral at this stage is desirable. It can impart the necessary flexibility for the monetary policy in future to respond to any development on either side,” said panel member Ravindra H. Dholakia.
Analysts said the minutes showed how inflation concerns, and the need to preserve the RBI’s target of 4 percent, had driven its decision-making.
The MPC was appointed in September, and has sought to shore up its inflation credentials while striving for unanimity: all its three meetings have seen a vote of 6-0. MPC members also expressed concern about the global economic environment at a time when emerging markets have been under pressure as the U.S. Federal Reserve gears up to raise interest rates later this year.
“Broadly, the importance of the 4 percent (target) is clear to see,” said A Prasanna, an economist at ICICI Securities Primary Dealership.
“Retaining an accommodative stance may have meant committing to future easing of monetary policy. MPC felt they cannot maintain such a commitment, given the global developments.” A majority of analysts surveyed by Reuters expect the RBI to keep its repo rate unchanged until mid-2018, after having lowered it 175 bps from January 2015 to October last year - the most aggressive easing since the global financial crisis.

 

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