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RBI's Monetary Policy Minutes

Worry that rising consumer prices will threaten the Indian central bank’s inflation target of 4% led the majority of the Reserve Bank of India’s monetary policy committee to vote to keep rates steady, according to minutes issued on Wednesday. Here is the full text of the bi-monthly monetary policy statement of RBI’s Monetary Policy Committee.

Minutes of the Monetary Policy Committee Meeting

October 3-4 , 2017

The seventh meeting of the Monetary Policy Committee (MPC), constituted under section 45ZB of the amended Reserve Bank of India Act, 1934, was held on October 3 and 4, 2017 at the Reserve Bank of India, Mumbai.

2. The meeting was attended by all the members — Dr. Chetan Ghate, Professor, Indian Statistical Institute; Dr. Pami Dua, Director, Delhi School of Economics; Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad; Dr. Michael Debabrata Patra, Executive Director (the officer of the Reserve Bank nominated by the Central Board under Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934); Dr. Viral V. Acharya, Deputy Governor in charge of monetary policy — and was chaired by Dr. Urjit R. Patel, Governor.

3. According to Section 45ZL of the amended Reserve Bank of India Act, 1934, the Reserve Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting which shall include the following, namely:–

a) the resolution adopted at the meeting of the Monetary Policy Committee;

b) the vote of each member of the Monetary Policy Committee, ascribed to such member, on the resolution adopted in the said meeting; and

C) the statement of each member of the Monetary Policy Committee under sub-section (11) of section 45ZI on the resolution adopted in the said meeting.

4. The MPC reviewed the surveys conducted by the Reserve Bank to gauge consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The MPC also reviewed in detail staff’s macroeconomic projections, and alternative scenarios around various risks to the outlook. Drawing on the above and after extensive discussions on the stance of monetary policy, the MPC adopted the resolution that is set out below.


5. On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to:

- keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.0%.

Consequently, the reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%.

The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. The main considerations underlying the decision are set out in the statement below.

Statement by Dr. Pami Dua

32. On the inflation front, retail inflation recorded a five-month high in August, 2017. This was driven partly by the dissipation of the favourable base effect and a rebound in food inflation, due to an increase in vegetable prices. CPI inflation, excluding food and fuel, rose sharply as a result of hardening of prices in several categories. Housing inflation increased on account of higher house rent allowances for central government employees under the 7th central pay commission award. Other sub-groups witnessing an increase included household goods and services, clothing, footwear, and miscellaneous items.

33. Brent crude oil prices also surged in September, while the rupee weakened. Other upside risks to inflation include the impact of an expected decline in the production of foodgrains due to lower sowing during the kharif season; the uncertainty in the short-term with respect to the effect of GST; the effects of a possible central government stimulus; the likely fiscal slippages due to the farm loan waivers; and the introduction of the pay commission award by states. Further, a potential increase in financial market volatility due to global developments, including the unwinding of the balance sheet by the Fed and the possibility of normalisation by the ECB, are also major concerns.

34. These risks to inflation are reinforced by the responses to forward-looking surveys of consumers. Specifically, the qualitative responses to the September 2017 round of the Reserve Bank’s Inflation Expectations Survey of households indicate that the proportion of respondents expecting the general price level to increase by more than the current rate rose over the three-month as well as the one-year horizons. The September round of the Consumer Confidence Survey also signals the expectation of an increase in the price level in the next one year. Moreover, an uptick in the Indian Future Inflation Gauge, a harbinger of inflation (constructed by the Economic Cycle Research Institute (ECRI), New York, with which the author is affiliated), indicates a firming in underlying inflationary pressures.

35. On the output front, GDP growth slowed down significantly in the first quarter of 2017-18, reflecting slower agricultural and manufacturing growth, along with tepid consumption and investment demand. Growth in services sector, however, picked up with an uptick in trade, hotels, transport and communication. The lacklustre growth is picked up by the September round of the Reserve Bank’s Consumer Confidence Survey, which shows a fall in the Current Situation Index as well as the Future Expectations Index, due to worsening sentiment on income and employment. Furthermore, growth in ECRI’s Indian Leading Index, a predictor of future economic activity, has eased in recent months. This suggests an urgent need to revive investment activity and reinvigorate infrastructure-related projects, amongst other measures.

36. At the same time, growth in ECRI’s Indian Leading Exports Index, that anticipates the direction of growth in exports, is declining. It is also notable in this context that, while international growth is currently robust, ECRI’s Leading Indexes of the global economy indicate waning global growth prospects.

37. In the current scenario, a wait and watch strategy is recommended with continuous monitoring of data to distinguish between a temporary effect and a long-lasting, structural impact.

38. Thus, I vote for keeping the policy repo rate unchanged.


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