PATEL TURNS DOVISH

MPC CUTS REPO BY 25 BASIS POINTS

In a departure from his predecessor Raghuram Rajan's inflation-focussed policy, RBI Governor Urjit Patel today steered a long-demanded rate cut despite the central bank's report raising concerns over acceleration in prices, on account of the 7th pay commission award. Taking a dovish stand despite upside risks to inflation, the 6-member Monetary Policy Committee (MPC), headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, by 0.25 per cent to 6.25 per cent -- lowest since November 2010. "While there are issues related to upside risks to inflation, and we have always said the direct impact of house rent allowances (HRA) due to second round impact of the pay panel award on retail inflation will be looked through," Patel told reporters in his maiden press conference after taking over on September 5. "It is the highly uncertain indirect effect which we will have to wait for in terms of both how the HRA is going to be implemented and then the consequences thereon," he added. This is the second reduction in the rates by RBI since April and extends the easing cycle begun in January 2015. Consequently, the reverse repo rate has also come down by a similar percentage point to 5.75 per cent. Patel, who was known to be more hawkish than Rajan who took inflation fight as his primary focus, said reforms undertaken by the government in the recent past have eased the supply constraints. "There is large investment in the Railways and roads which will improve infrastructure. The proactive food management policy by the government has played a crucial role in the past two years and will continue to play a crucial roles in the time to come. There is improvement in the pulses supply and there has been sharp improvement in competitiveness ranking," he said. MPC, which met for the first time for RBI's fourth bi-monthly monetary policy review, was set up recently to make decision-making more transparent and more collegiate. Till then, the RBI governor was taking call on rates. The rate cut comes amidst falling consumer inflation which eased to a five-month low of 5.05 per cent in August, within the MPC's 2-6 per cent target, and is expected to ease further following a good monsoon and record food production. On the other hand, the Monetary Policy Report, released ahead of the policy review, said while the second round impact of the seventh pay panel award in the form of salaries and pensions is incorporated in the baseline forecast, the effect of HRA is not factored in, as its implementation was deferred.

The report said that as and when the revised allowances are awarded, they will have a direct impact on CPI inflation through increase in housing inflation (house rents have a weight of 9.5 per cent in the CPI). In addition, indirect effects could arise through inflation expectations.
"Assuming that the revised allowances are implemented from early 2017, the increase proposed by the pay hike (is) retained, and the states implement a similar order of increase in allowances with a lag of one quarter, headline CPI in 2017-18 could be 100-150 bps above the baseline," MPR said, adding that this would lead to rate tightening.
On the international backdrop under which the policy was designed, Patel said for the first time in a long time the weak global demand is actually going to drag down trade volumes.
"It is possible this week at the IMF meetings there will be a further possible downgrade of global growth. I will be surprised if there isn't," Patel said.
"And, there is also the issue of the outcome of the forthcoming American elections," he said, adding that the policy was formed after 2-day deliberations of the MPC.
Moving away from the usual practise of announcement at 1100 hrs, the fourth bimonthly review was announced at 1430 hrs after the MPC meeting concluded. The MPC met the whole day yesterday and from 1200 hrs to 1400 hrs today in Mumbai.
On the new timing of the policy announcement, Patel told reporters, "I know the media had to work a little harder this time because of the change in time which has been necessitated not to make things harder for you but due to the process and time logistics which is entailed in the committee decision making more than we are now in.
"We did a scan of central banks and what we have introduced with a mid-afternoon policy decision today in terms of timing is broadly the norm elsewhere."
Welcoming the MPC members, he said they will be a source of support to the RBI and the nation, and will help enhance the monetary policy process and the quality of monetary policy making.
"We've been meeting over the past day and half, going through presentations, discussions, drafting and coming to a conclusions on the repo rate. We have a great MPC," he said.
"Our discussions were frank, often intense but friendly. We allowed each other to speak and we ensured that there is no ranking and at the end of the day we agreed on MPC resolution that we have placed before the nation," Patel said.