Here's why a lone dove asked for rate hike in last MPC meeting

The recently-released minutes of the Monetary Policy Committee's (MPC) meeting held earlier this month has, once again, put the spotlight on India's spiralling inflation. "The December bi-monthly resolution projected inflation in the range of 4.3-4.7 per cent in the second half of 2017-18, including the impact of increase in HRA," says the RBI release, adding that courtesy factors like food prices and fuel prices - both on an uptick - "inflation is now estimated at 5.1 per cent in Q4, including the HRA impact".

The forecast range for the first half of 2018-19 goes up to 5.6 per cent, well over the apex bank's medium-term consumer price index-based (CPI-based) inflation target of 4 per cent. Turning to the growth outlook, the MPC projected GVA growth at 6.6 per cent for 2017-18, going up to the range of 7.3-7.4 per cent in the first half of the next fiscal.

In such a scenario, some experts have questioned the MPC's decision to "keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6 per cent". "[Given] what has transpired in the MPC meetings this financial year so far, yesterday's decision of RBI only means one thing: Either RBI had got it wrong when it didn't previously cut the rates more aggressively or, still worse, it is wrong now," noted Smartkarma Insight Provider Pankaj Sharma in a report after the MPC's decision was announced on February 7.

Interestingly, the last meeting had a lone voice calling for a rate hike, that of Dr Michael Debabrata Patra, Executive Director of the RBI and the central bank board's nominee on the MPC. "In April last year, I expressed a preference for a pre-emptive policy rate increase, sensing that inflation is rising out of the demonetisation trough," Patra said in his statement, adding that he nonetheless voted for holding the rate steady in subsequent meetings to allow transitory effects to fully pass. "My vote for status quo was maintained in August even though the Committee by majority decision reduced the policy rate by 25 basis points in that meeting," he said and, indeed, his stance "had been vindicated" by October. According to Patra, his vote was conditioned to inflation staying within the target but it has only spiralled ever since.

"By the December meeting, the time had come to take guard, bringing to critical mass my stance articulated since April," he said, explaining that with "several drivers of inflation are firing at the same time" currently, "a series of rate increases may be warranted to remove excessive accommodation". He summed up his statement saying that "I vote for an increase of 25 basis points in the policy rate to commence the withdrawal of accommodation."

But the other MPC members voted to keep the policy repo rate on hold and continue with the neutral stance, noting that "the economy is on a recovery path", which needed to be "carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management". The broad consensus was to adopt a wait-and-watch policy, allowing a clearer picture to emerge before acting. The MPC also noted that though there was "a need for vigilance around the evolving inflation scenario", mitigating factors like subdued capacity utilisation, a possibility of softening oil prices and moderate rural real wage growth, could not be ignored.

But the party may not last much longer. "The next few months of inflation and growth data will be key to determining the evolution of policy rates," said Dr Viral V. Acharya. "If growth remains robust and inflation prints continue to project headline inflation a year ahead well above the target, then a change in stance from "neutral" to "withdrawal of accommodation" might have to be considered." The writing on the wall for the common man is clear: Prepare your wallets to take a hit. "In a scenario of improving economic activity, rising input costs are likely to be passed on to consumers," the MPC noted.