RBI panel warns on inflation as it monitors growth

RBI panel warns on inflation as it monitors growth”

According to the RBI deputy governor, headline inflation prints since the last policy have been significantly above the target. When one member of the committee voted for a 25 basis point hike in interest rate, other members of the committee arg-ued for a "wait and watch" approach till more clarity emerges on growth-inflation dynamics. The central bank had raised its March quarter Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year.

"By the December meeting, the time had come to take guard, bringing to critical mass my stance articulated since April", he said, explaining that with "several drivers of inflation are firing at the same time" now, "a series of rate increases may be warranted to remove excessive accommodation". "The (inflation) target is in danger of getting out of reach and over the next few months, the upper tolerance band is under threat", he noted. "The time to begin is upon us", he said. "Fixed income markets are telling us that we have fallen behind the curve", he added.

Retail inflation slowed to 5.07% in January from 5.21% a month ago. According to Patra, his vote was conditioned to inflation staying within the target but it has only spiralled ever since.

Finally, the confluence of domestic fiscal developments and normalization of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors, the bank said. Despite the growth impulses the governor said that the recovery was nascent and needed to be protected compelling him to vote for keeping interest rates on hold.

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The MPC members expressed concern about continued inflationary risks, citing factors including high food and global crude prices and the government's decision to increase spending for the year starting in April to support a struggling agricultural sector. In the minutes of MPC released on Wednesday, Patel said that in addition to creating inflationary pressures the "high fiscal deficit has attendant "crowding-out" implications with regard to the cost of private domestic credit".

"Such an inflation scenario would imply a raise in policy rates by a pure inflation targeting central bank, in turn, implying a change in stance from "neutral" to "withdrawal of accommodation", he said". "The December bi-monthly resolution projected inflation in the range of 4.3-4.7 per cent in the second half of 2017-18, including the impact of increase in HRA", says the RBI release, adding that courtesy factors like food prices and fuel prices - both on an uptick - "inflation is now estimated at 5.1 per cent in Q4, including the HRA impact". The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture.

"Then a change in stance from "neutral" to "withdrawal of accommodation" might have to be considered", he said.

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