Going by the minutes, external member Ravindra Dholakia, who until the last policy had advocated a cut in policy rates, expressed his discomfort with rising prices this time.
“Although the headline inflation was expected to rise in November and December last year, the extent of the increase was higher than my expectation,” said Dholakia. He argued saying “prudence lay to following the policy of wait and watch and allow a clearer picture to emerge”, even as the inflation numbers are likely to decline in the next three-four months.
RBI’s Executive Director Michael Patra said the near-term inflation outlook up to mid-2018 is likely to drift above the target. The expected easing of inflation between July 2018 and March 2019 would largely be statistical as the HRA effect wanes.
“The target is in danger of getting out of reach. Over the next few months, the upper tolerance band is under threat. This could seriously dent the credibility of the MPC’s commitment to the target,” Patra said.
The real policy rate (policy repo rate minus inflation) was below 1 per cent and could fall further sans policy action, which is “completely misaligned with underlying fundamentals and the economy’s prospects at a time when activity is picking up. In view of the prolonged period of status quo, a series of rate increases may be warranted to remove excessive accommodation,” Patra said.
“The time to begin is upon us. I vote for an increase of 25 basis points in the policy rate to commence the withdrawal of accommodation,” the minutes quoted Patra.
Deputy Governor Viral Acharya said he would have favoured changing the stance from “neutral” to “withdrawal of accommodation,” but for two reasons: First, rising oil prices would also encourage rising shale gas production, which could “dampen oil prices swiftly.”
“Second, for a flexible inflation targeting framework, the growth trajectory relative to potential output has to be considered too. On this front, the output gap remains somewhat negative though it has been steadily closing.” Output gap is the difference between the potential output capability of an economy and the actual output.
In this context, the recent pickup in credit seemed to be sustainable as banks’ balance sheets improved after recapitalisation and the ongoing resolution of large stressed assets further catalysed the recovery. However, the recovery was still “nascent and worthy of some support in the short run,” Acharya added.
RBI Governor Urjit Patel favoured examining incoming data for “greater clarity on the persistence of inflationary pressures.”
“The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture. I, therefore, vote for keeping the policy repo rate on hold while maintaining a neutral stance.”
The other two external members – Pami Dua and and Chetan Ghate - also voted for a pause.