India’s inflation is on a downward trend, but one needs to be careful, central bank minutes show

By Swati Bhat

MUMBAI (Reuters) – India cannot risk another spike in inflation and the Monetary Policy Committee (MPC) must take a cautious approach in cutting interest rates, members of the rate-setting panel said in minutes of the October meeting.

The MPC, comprising three Reserve Bank of India (RBI) and three external members, had kept the repo rate unchanged at 6.50% for the 10th consecutive day while changing the monetary policy stance to neutral.

The board has three new external members who were appointed to four-year terms earlier this month.

“The uphill battle against inflation is far from won, but we are more confident that we can sustainably bring CPI inflation closer to target,” external member Saugata Bhattacharya said in the minutes released on Wednesday.

Michael Patra, deputy governor of the RBI, wrote that while persistent inflationary pressures could ease with a less restrictive stance in monetary policy, “reducing restraint too quickly could undermine progress in controlling inflation.”

India’s retail inflation rose to its highest in nine months at 5.49% in September due to higher food prices, data released after the MPC meeting showed. The central bank aims for inflation of 4%.

Five of the six MPC members had voted to maintain the key interest rate while newly appointed external member Nagesh Kumar voted for a 25 basis point cut in the key interest rate.

“Given that inflation expectations have been successfully anchored and industrial demand is weakening in both domestic and export markets, a rate cut could help revive demand and boost private investment,” Kumar said.

Demand deficits in both domestic and foreign markets could be the reason why private investment has not gained momentum despite healthy corporate balance sheets and government reforms, he added.

RBI Governor Shaktikanta Das reiterated his stance that interest rate cuts may be premature.

“At this stage of the economic cycle, having come this far, we cannot risk another spike in inflation. The best approach now would be to remain flexible and wait for further signs that inflation is moving towards target on a sustained basis,” he wrote.

(Reporting by Swati Bhat; Editing by Mrigank Dhaniwala)