In the meeting on December 6-7, the panel expressed the view that the effects of demonetisation would not last long and it was more necessary to achieve the inflation target.
The six members of the MPC are Chetan Ghate, Pami Dua, Ravindra H Dholakia (all academicians), Michael Debabrata Patra (RBI executive director), Deputy Governor R Gandhi and governor Urjit R Patel.
Apart from the uncertainty whether the US Federal Reserve would hike its interest rate, the members wanted to wait till the effects of demonetisation played themselves out. Besides, the members wanted the banks to take advantage of the previous 1.75 percentage point cut in the repo rate. The RBI data say the average reduction in the bank lending rate till September has been 71 basis points.
“An additional cut at this juncture may not yield any further transmission from banks…Once the Budget is announced in February, there will be one more data point,” said the committee report.
Another reason for not cutting the rate was that there were no hard data for November. The next policy announcement will be on February 8. RBI governor Urjit Patel stressed on the need to maintain inflation within the targeted threshold.
“The impact of the withdrawal of (high-value notes) on growth and inflation, while uncertain, is transitory. Against this backdrop, it is important for monetary policy to stay focused on the medium term and strive to achieve, on a durable basis, the middle of the notified inflation target range i.e., 4%,” said Urjit Patel, governor, RBI.
Patel also said the risk arising out of global financial conditions were not showing any signs of abating.
The other members of the MPC were concerned at the rising prices of crude oil and other commodity prices. Ghate said: “Because of the increased uncertainty due to the withdrawal of SBNs (specified bank notes), and virtually no hard data for November, it would be prudent to ‘wait-and-watch’.”
“My paramount concern at this juncture has to do with the stickiness of inflation excluding food and fuel.”
Pami Dua said in the meeting that the Indian economy was “in a resilient state ahead of the decision to withdraw SBNs… the economic growth outlook going into the autumn months had become increasingly optimistic, underscoring the economy’s resilience to potential negative shocks.”
“Thus, from a business cycle perspective, at the time, the Indian economy was not vulnerable,” Dua said.
According to Dholakia, scrapping the high-value notes would result in heavy liquidity in banking system and this in turn would drive down rates.