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Policymakers Tread With Caution as Divide Deepens in RBI Over Rate Cut

The MPC voted to keep the key policy rate unchanged.

The MPC voted to keep the key policy rate unchanged.

While one member of the six-member committee voted for a steep cut to improve growth, another wanted the RBI to tighten the belt.

New Delhi: The minutes of the October meeting of the Monetary Policy Committee suggests a widening rift within the panel as members disagreed sharply on the growth and inflation outlook and appropriate policy response.

While one member of the six-member committee voted for a steep cut to improve growth, another wanted the RBI to tighten the belt. Governor Urjit Patel, his deputy Viral Acharya, and Pami Dua decided to play safe and said more data was needed to ascertain risks, Bloomberg reported.

At the end of the meeting, five of the six members voted to keep the key policy rate unchanged. Government nominee in the MPC, Ravindra Dholakia, was the sole dissenter voting for a 25 bps rate cut.

According to the minutes of the meeting released on Wednesday, Dholakia argued there was enough room for more rate cuts and inflation would only rise marginally. “In my view, the policy rate should have been cut by 50 basis points long back in June 2017. A cut of 25 basis points in August was too small and too late," he said.

Michael Patra, on the other hand, said the RBI should be ready to raise interest rates if inflation breaches the 4 per cent. Data released after the RBI's decision showed inflation unexpectedly steadied at 3.3 percent in September from a year earlier.

Analysts said that while Dholakia and Patra are likely to continue to vote for a cut and a pause, respectively, the response of the other four members will depend on how well growth holds up.

“The divergence in views of Dholakia and Patra remains intact with the former seeing space for a 40 bps rate cut owing to very high real rates, while the latter voting for a pause, but stated that the MPC must be ready to raise rates if needed,” a report by Japanese brokerage Nomura noted.

“Most members also expressed concerns about slowing growth, especially weaker Q1 outturn, but decided to wait for more data to ascertain whether the dip is sustained, as GST implementation has also played a role,” the report added.