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MPC members raised concerns about inflation

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MUMBAI: Reserve Bank of Indias (RBI) monetary policy committee members have raised concerns on elevated levels of inflation even as they voted to keep rates unchanged, minutes from the panels meeting held earlier this month showed.

Even as the majority of the six-member committee voted to keep interest rates unchanged and change the RBIs stance from neutral to calibrated tightening, five out of six members expressed concerns on rising inflation.

The factors they had cited include higher oil costs, higher minimum support prices, elevated household inflation expectations, risks of domestic fiscal slippage, and volatilities in emerging markets.

Deputy Governor Viral Acharya pointed to the risks of rising fuel prices as oil heads beyond $80 to a barrel. “The rising oil prices also coincide with the misfortune of weaker current account balance, inducing financial market volatility which raises imported inflation, though the direct impact of oil price on inflation via the consequent fare price impact is much larger,” said Acharya, who voted along with the majority to keep rates unchanged but alter the central banks stance.

Chetan Ghate, who was the lone dissenting voice seeking a rate hike, pointed to rising household inflationary expectations. “If there is substantial deviation of inflationary expectations in relation to the target, by failing to react with the policy interest rate, we will lose credibility and reduce our capacity to influence expectations,” he said.

He added that anchoring inflation expectations is extremely important in an inflation-targeting regime.

Members also warned about the risks associated with the higher house rent allowances (HRA), and the passthrough impact on inflation.

“The upside risks associated with an increase in minimum support prices (MSPs) and the HRA still persist, although the latter has somewhat moderated. Risks due to an increase in state level HRAs and input prices also prevail. Thus, there is considerable uncertainty with respect to the inflation outlook,” said Pami Dua.

RBI executive director in charge of the monetary policy department Michael Patra said that though both household and professional forecasters have lowered their inflation expectations one year ahead, the balance of risks is shifting to the upside.

“Monetary policy needs to move to high alert, and this needs to be reflected in a proactive policy stance. Overarchingly, monetary policy needs to stay focused on its mandate — the target of 4% inflation, while keeping in mind the objective of growth within the RBIs overall policy framework that assigns appropriate instruments to goals in order to secure efficient policy outcomes,” Patra said, while voting to change the RBI stance.

IIM Ahmedabad professor, Ravindra Dholakia, the only member to vote against changing the RBI stance, said that although the rupee has weakened, the depreciation is lower in terms of trade weighted nominal effective exchange rate (NEER).

He also argued that although oil prices are rising, it has a lagged effect on inflation due to revisions in domestic taxes and productivity improvements, which could offset the rise in prices.

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