February 21, 2018 / 11:58 AM / 4 months ago

RBI panel warns on inflation as it monitors growth

MUMBAI (Reuters) - Minutes from the Reserve Bank of India’s meeting this month showed monetary policy committee members expressing concerns about accelerating inflation, although that was also tempered by uncertainty about the strength of an economic recovery.

A Reserve Bank of India (RBI) logo is seen at the entrance gate of its headquarters in Mumbai, June 7, 2017. REUTERS/Shailesh Andrade/Files

The MPC voted 5-1 at the meeting to keep the policy rate on hold at 6.0 percent and to retain its “neutral” monetary policy stance. RBI Executive Director Michael Patra was the sole member to vote for a 25 basic point hike.

The minutes released on Wednesday showed widespread concerns among the six MPC members about inflation, which accelerated to a 17-month high of 5.21 percent in December from a year earlier, driven higher by food and energy.

Although data after the RBI meeting showed inflation easing to 5.07 percent in January, that remains well above the central bank’s 4 percent target.

The MPC members expressed concern about continued inflationary risks, citing factors including high food and global crude prices and the government’s decision to increase spending for the year starting in April to support a struggling agricultural sector.

But most also appeared mindful of wanting to see a stronger economic recovery, despite promising signs. The government has projected growth could accelerate to 7 to 7.5 percent in 2018/19 after expanding at its slowest in three years. India will next report growth data on Feb. 28.

“Although inflation risks have increased in recent months, incoming data should provide greater clarity about the persistence of inflationary pressures,” RBI Governor Urjit Patel was quoted as saying.

“The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture.”

Nonetheless, worries the RBI could soon move to raise rates are likely to persist. The benchmark 10-year bond yield has risen 127 basis points since the central bank last cut its repo rate by 25 bps on Aug. 2.

RBI’s Patra, after voting for a hike, said inflation would accelerate “well above” the central bank’s target until the middle of the year.

“A series of rate increases may be warranted to remove excessive accommodation. The time to begin is upon us,” he said.

RBI Deputy Governor Viral Acharya, who looks after monetary policy, voted to keep rates on hold, calling an economic recovery “nascent and worthy of some support in the short run”.

But he warned he would consider changing the RBI’s stance should inflation accelerate.

“Then a change in stance from ‘neutral’ to ‘withdrawal of accommodation’ might have to be considered,” he said.

Additional reporting by Swati Bhat, Euan Rocha, Devidutta Tripathy, Promit Mukherjee, and Sudipto Ganguly; Editing by Nick Macfie

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