No RBI rate cuts for now? See what monetary policy panel minutes revealed

Subdued prices of vegetables and fruits in summer, when prices normally tend to escalate, gave comfort to Reserve Bank of India (RBI) governor Urjit Patel to hold on to rates, but the higher oil prices forced him to change the stance from neutral to calibrated tightening.

The RBI kept the policy repo rate unchanged. “We are not obliged to increase the rate at every policy meeting,” Patel said in the Monetary Policy Committee (MPC) meeting.

The minutes of the MPC reveal that all the three members from RBI - governor Urjit Patel, deputy governor Viral Acharya and executive director Michael Patra - wanted a change in the monetary policy stance from neutral to calibrated tightening. Among the external members, academic Pami Dua also voted for a calibrated tightening.

RBI governor reasoned that the change in the central bank’s stance is due to the rising international oil prices that pose a challenge to inflation. He said in the current rate cycle “rate cuts are off the table”. RBI had maintained a status quo in its October policy after two consecutive rounds of rate hikes of 0.25% each.

“Calibrated tightening” means that in the current rate cycle a cut in the policy repo rate is off the table, revealed the minutes of the meeting released on the RBI website last week.

Michael Patra, an inflation hawk who batted for a rate hike in most earlier MPC meetings, justified the change in policy stance due to the tight corporate finances. “It is only a matter of time before firms pass through the heightened input costs more aggressively into selling prices,” Patra said.

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Most members were also influenced by the inflation expectations of both households and professional forecasters, which are market participants such as foreign banks. The professional forecasters expected inflation to come down and see the pass-through impact of the 0.50% rate hike that the central bank undertook during the financial year (April and June 2018).