Urjit Patel-led Reserve Bank of India (RBI) decided to cut interest rates (repo rate) by 25 basis points on October 4, 2016. This was the first policy decision of the recently constitued Monetary Policy Committee (MPC) which voted unanimously. 

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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, feedback from industry associations and the projections of professional forecasters. 

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According to Section 45ZL of the amended Reserve Bank of India Act, 1934, RBI has published minutes of the proceedings of the meeting.

Statement by Dr. Chetan Ghate

In view of a good monsoon, a decline in food inflation and better food supply management by the government, there has been some abatement of both cyclical and structural risks to the March 2017 consumer price index (CPI) inflation target.

With persistent slack in the economy evidenced by unutilised capacity over the past few years, corporate pricing power remains weak. The persistence of core inflation remains a concern. While I recognise that upside risks to meeting the objective of 5 per cent CPI inflation by Q4 of 2016-17 remain, given the current juncture, these are acceptable risks. Expectations of future inflation at the monetary policy horizon, as evidenced by the survey of professional forecasters, are closer to the inflation target, which is also expected to contribute to low and stable inflation.

On growth, there are signs of revival of economic activity, which needs to be nurtured. Taking into account these considerations, I vote for a 25 basis points (bps) cut in the policy repo rate from 6.50 per cent to 6.25 per cent at today’s meeting of the Monetary Policy Committee.

Statement by Dr. Pami Dua

The modest softening of inflation and inflation expectations seen in some of the surveys conducted by the Reserve Bank, along with lacklustre private investment spending and unused capacity, provides a window for a reduction in the policy rate.

While RBI’s Inflation Expectations Survey of Households suggests elevated inflation expectations, the Consumer Confidence Survey presents an encouraging outlook for the price situation as well as future economic conditions. Further, while RBI’s Industrial Outlook Survey suggests some increase in input price pressures in the manufacturing sector in the short-run, this is not expected to transmit to higher selling prices. On the other hand, input cost expectations are muted in the infrastructure sector. Additionally, the Survey of Professional Forecasters suggests anchoring of inflation expectations.

In this backdrop, I feel that it is a good time to support growth by reducing the policy rate.

Accordingly, I vote for a 25 basis points (bps) cut in the policy repo rate from 6.50 per cent to 6.25 per cent at today’s meeting of the Monetary Policy Committee.

Statement by Dr. Ravindra H. Dholakia

Some of the upside risks to inflation discussed in the MPC meeting on October 3 and 4, 2016, particularly arising out of the award of the 7th Pay Commission, are largely statistical according to me. Looking forward, in my opinion, the probability of inflation turning up from the current level is reasonably less. On the other hand, there are good chances for the consumer inflation to soften further substantially, benefiting from a good monsoon, supply management measures of the Government and ongoing reforms gaining traction in terms of reducing costs and improving output response.

As far as the growth outlook is concerned, I hold the view that the potential growth path of the Indian economy is gradually moving up, particularly in response to several reform measures implemented by the Government. Since there is substantial under-utilisation of capacity in the system, I do not see major risk to inflation if the output gap closes fast. The above assessment gives me the comfort to vote in favour of a cut in the repo rate by 25 basis points.

Statement by Dr. Michael Debabrata Patra

I vote for a reduction in the policy repo rate by 25 basis points and I fully endorse the rationale for the decision set out in the fourth bi-monthly monetary policy statement.

Several parts of the economy are languishing, but as the statement points out, other parts – agricultural activity; steel production; public investment in roads, railways and inland waterways; some categories of services; transmission of policy impulses through financial markets stimulated by ample liquidity; foreign portfolio investment – are mending and coming together for a potential revival. The most important among these positives is the improvement in the inflation outlook.

In a framework in which inflation forecasts congeal all available information and serve as the intermediate target of monetary policy, two aspects are noteworthy: (a) the level of the inflation forecast for Q4 of 2016-17 is closer to the target than before; and (b) it has been moving down in relation to the second and third bi-monthly statement projections. This is not to say that the beast has been beaten or it’s back broken, but there is a turn in its momentum that is exploitable, especially by measures that hold down month-on-month changes in prices of essential food items.

Moreover, the reduction in inflation in August is more real than statistical – a collapse in momentum which allowed the play of base effects. If the beneficial effects of the satisfactory monsoon keep momentum muted and take inflation below the projection for Q3, the target for Q4 should be achievable. Therefore, while staying focused on the path of disinflation set out in previous monetary policy statements, it is, in my view, most timely now to reduce the policy rate by 25 basis points and drive the actualisation of the macroeconomic configuration that seems to be forming – a reasonable probability of inflation converging to its target and the economy poised on the threshold of an acceleration of growth in the next three quarters of the year.

It is crucial, however, to step up vigil around the upturn in inflation projected in the last quarter of 2016-17 to guard against any risk to the target.

Statement by Shri R. Gandhi

I agree with the assessment of risks to growth and inflation presented in the MPC resolution and vote in favour of lowering the policy repo rate by 25 basis points because of the following specific reasons.

While risks to India’s growth from a still fragile global economy have increased, particularly through the trade channel, risks to inflation from global factors may be easing, going by the observed high intensity and spread of global disinflation.

From amongst the domestic sources of risks to inflation, I see the maximum comfort coming from pulses. The first advance estimates of kharif foodgrains point to pulses production rising by 57 per cent this year. Despite two consecutive years of droughts, food inflation could be contained because of effective supply management measures by the Government. With a normal monsoon this year, I expect food inflation to stay even more firmly contained. Given the high weight of food in the CPI basket, supply response and supply management will remain critically important to influence the space for monetary policy actions.

On the growth front, while the pace is expected to gain gradual momentum, the private investment cycle remains depressed and is yet to respond adequately to the improving consumption demand. Recent data on production of capital goods, imports of capital goods and flow of credit to industry indicate the weak state of investment demand. In this environment, a rate cut according to me will help in 7 stimulating investment demand while also easing somewhat the pressure on firms stemming from balance sheet repairs.

Statement by Dr. Urjit R. Patel

Indicators of economic activity pointed to a subdued outlook, though gradually improving; further, continuing low capacity utilisation in industry and the persistence of the output gap suggested that pricing power is likely to remain low. Importantly, high frequency data embedded in our forward-looking surveys as well as daily movements in prices of fruits and vegetables, cereals and even pulses across the country gave us some confidence that the inflation target of 5 per cent for Q4 of 2016-17 can be achieved.

Therefore, while our model-based projections indicated upside risks to the target, a calibrated policy judgement was warranted, given that some space for policy action had opened up with the fall in inflation in the August reading. Nonetheless, inflation outcomes in Q4 will have to be carefully and continuously monitored as upside risks, albeit lower now than before, persist.