Interesting to see how MPC will tackle monetary policy: Fitch

Interesting to see how MPC will tackle monetary policy: Fitch

New Delhi, Oct 3 (IANS) A day before the Reserve Bank of India announces 2016-17’s fourth monetary bi-monthly policy, rating agency Fitch said it is waiting to see how the newly-formed Monetary Policy Committee tackles it, hinting that a low inflation targeting could positively impact the country’s rating.

“The inflation targeting framework now in place, should reduce the impact of pressures, but it will be interesting to see how this will play out in the Monetary Policy Committee (MPC), in which members appointed by both the government and RBI, will have a vote on monetary policy,” Thomas Rookmaaker, Director, Asia-Pacific Sovereigns Group, Fitch Ratings, told IANS.

“Structurally low inflation would positively impact the sovereign rating profile as it would improve the investment climate and, hence, contribute to sustainable growth,” he added.

Fitch implied that it expected no rate cuts with a focus on containing inflation in Tuesday’s policy, which will be also the first under the leadership of new Governor Urjit Patel.

“The fact that Dr. Patel has served as deputy governor in the past three years, suggests continuation of the current policy direction in the years ahead. Dr. Patel was part of the team at RBI that set in motion significant policy changes to deal with both high inflation and weak bank balance sheets, including through the set-up of new policy frameworks,” Rookmaaker told IANS in an e-mail interview.

The elevation of Patel has raised expectations among those who were critical of his predecessor Raghruam Rajan for not easing enough the monetary policy by cutting rates, though Patel’s moorings are as monetarist and he is considered to attach the same importance to inflation control.

The MPC, which is now tasked with the job of taking a call on the interest rates, would theoretically target the range around the mid-point and not one of the outer points specifically, though it was early to tell if inflation in practice will remain skewed to one side of the range, Rookmaaker said.

The government has set an annual inflation target of four per cent, plus or minus two percentage points.

“The inflation target range that the RBI will use in the medium term seems rather broad, in the sense that 2 per cent seems quite low and 6 per cent quite high for an emerging economy like India. But it seems to make sense to have a rather broad range around the 4 per cent mid-point, as food and oil price movements can have a large impact on headline inflation,” Rookmaaker said.

Wholesale food price inflation was 5.3 per cent during financial years 1996 to 2005 but increased to 9.2 per cent between financial years 2006 and 2016. Clearly, the fight on the inflation front, particularly food inflation, is far from over.

RBI Monetary Policy Committee begins its first meeting

Mumbai, Oct 3 (IANS) The newly-constituted Monetary Policy Committee (MPC) headed by the Reserve Bank of India Governor Urjit Patel to fix the apex bank’s key interest rates began its first meeting here on Monday, ahead of the RBI’s first bi-monthly policy review under new governor.

The deliberations of the six-member committee would be made public along with announcement of the RBI monetary policy review, which is scheduled for 2.30 p.m. on Tuesday.

The six-member MPC has three members nominated by the Union government. If it is divided in its decision, the Governor can use his veto.

Meanwhile, experts said the MPC is unlikely to lower rates at its maiden review as it awaits more data on inflation.

“RBI may choose to wait for some more time before wielding the knife as inflationary trends may accelerate going forward,” Indian rating agency Crisil said in a recent research note.

American agency Fitch group company India Rating (Ind-Ra) said the sharp fall in retail inflation in August has accentuated the rate cut proposition in the next quarter itself, although it has made achievable the RBI’s target of bringing retail price inflation down to five per cent by March 2017.

“But it may be early to rejoice given the baffling behaviour of retail inflation in the past. The cyclical components either aggravate or soften it as is evident from the movement in wholesale prices,” Ind-Ra said.

“Clearly, the fight on the inflation front, particularly food inflation, is far from over,” it added.

India’s annual rate of inflation based on wholesale prices touched a two-year high in August at 3.74 per cent from 3.55 per cent in the month before, official data showed in September.

After rising for the first time in April following 17 straight months of contraction, the WPI has cumulatively risen by 4.45 per cent in the current fiscal up to August, as against 0.23 per cent for the corresponding period in 2015.

Food articles inflation in August increased by 8.23 per cent on year-on-year basis.

Earlier data on the consumer price index had showed that the annual retail inflation had eased by 100 basis points to 5.05 per cent in August.

The government last week named three academics from the country’s top institutions as its nominees. They are Chetan Ghate, Professor at the Indian Statistical Institute; Pami Dua, Director at Delhi School of Economics; and Ravindra Dholakia, Professor at the Indian Institute of Management, Ahmedabad.

The elevation of Patel has raised expectations among those who were critical of then Governor Raghuram Rajan for not easing enough the monetary policy by cutting rates, though his moorings are as monetarist as his predecessor and he is considered to attach the same importance to inflation control.

His views on monetary policy were expressed at the time Rajan held rates in the February 2015 review after making an unexpected rate cut a month earlier — the first in nearly two years — as he elaborated on the “important backdrop” to the move, citing the trend of accommodative monetary policies being adopted by developed economies.

Leave a Reply