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RBI Governor Urjit Patel in Favour of Retaining Repo Rate

RBI Governor Urjit Patel voted for status quo on the key interest rate arguing that the central bank needs to remain focused on inflation target as the impact of demonetisation on economy is uncertain, though transitory.

Releasing today the Minutes of the Monetary Policy Committee Meeting (MPC) held on December 6-7, Reserve Bank of India said all the six members of the panel were in favour of retaining the repo rate at 6.25 per cent.

In his submission before MPC, Patel said: "The impact of the withdrawal of SBNs (Specified Bank Notes of Rs 500 and Rs 1000) on growth and inflation, while uncertain, is transitory."

Against this backdrop, he said it is important for monetary policy to "stay focused" on the medium-term and strive to achieve, on a durable basis, the middle of the notified inflation target range of 4 per cent.

More recently, the steady easing of food inflation has brought about a decline in overall inflation expectations in the latest round of the survey, he said.

Patel added: "Inflation in advanced economies is turning up incipiently and is expected to rise significantly in 2017 from 2016 levels. Achieving the inflation target of 5 per cent for Q4 of 2016-17 and securing 4 per cent - the central point of the notified target range - remains the primary objective."

Deputy Governor R Gandhi too opined that there was uncertainty about the short-term impact of the decision to withdraw the legal tender status of Rs 500 and Rs 1000 denomination on the macroeconomy, although the impact is likely to be transitory.

"I, however, don't see any significant downside risks to the medium-term growth prospects of the economy. However, there are other uncertainties as well, especially the oil price situation and geo-political situation," he said.

Another member Ravindra H Dholakia said while the recent developments on SBNs can be considered as an "exogenous shock" to the economy that results in downward revision of the GDP growth forecast, it is widely perceived to be a transitory or temporary phenomenon.

"If it is so, it is not advisable to respond with a policy intervention that involves longer distributive lags, because otherwise it can destabilise the system or create avoidable uncertainty in policy stance and action in future," he said.

Another MPC member Pami Dua said that on the basis of the Indian leading indices produced by the Economic Cycle Research Institute (ECRI), it can be inferred that the Indian economy was in a resilient state ahead of the decision to withdraw SBNs.

She said a leading index predicts changes in economic activity and thus, cyclical turns in the economy.

Specifically, with the Indian Leading Index growth in a clear cyclical upswing and rising to a two-year high before the withdrawal of SBNs, the economic growth outlook going into the autumn months had become increasingly optimistic, underscoring the economy's resilience to potential negative shocks, she said.

"Thus, from a business cycle perspective, at the time, the Indian economy was not vulnerable...In this backdrop, the withdrawal of SBNs is expected to have only a transitory impact on economic activity," Dua added.

In the MPC, Michael Debabrata Patra opined while domestic supply disruptions and demand compression appear to be transient, global developments, including the morphing of political changes into macroeconomic risks, could likely be longer-lived and more challenging.

"Under these conditions, precaution warrants careful monitoring of the manner in which these forces play out and influence the near- to medium-term," said the RBI Executive Director.

RBI had unexpectedly kept interest rate unchanged despite calls for lowering it while it slashed the economic growth projection by half a per cent to 7.1 in the first policy review post demonetisation.


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