At the end of its two-day long policy review meet, the RBI on Wednesday kept the repo rate unchanged at 6 per cent. Five out of six MPC members were in favour of an unchanged repo rate. Dholakia was the only dissenter who suggested a 25 bps rate cut. External members Dholakia, Chetan Ghate and Pami Dua and internal members Michael Patra, Viral Acharya and Urjit R. Patel comprise the MPC.
Interestingly, the demand for a rate cut by Dholakia has persisted even as retail inflation measured by year-on-year change in the consumer price index (CPI) recorded a seven-month high in October.
The RBI increased the inflation forecast for the next two quarters from 4.2-4.6 per cent to 4.3-4.7 per cent on rising crude oil and vegetable prices.
In its previous policy review in October, the MPC highlighted upside risks to inflation and maintained a neutral policy stance. The MPC voted in favour of a status quo and again the only dissenter was Dholakia, who pushed for a steep 50 basis-point cut.
For several months, Dholakia has been rooting for a rate cut. In June, MPC broke ranks for the first time when it voted 5-1 to keep interest rates unchanged and Dholakia voted for a hefty 50-basis point cut.
In August meeting too, Dholakia pushed for a 50 bps rate cut. “As I had argued in the June 7, 2017 meeting of MPC, with a year ahead inflation forecast now brought down to 4 per cent by the RBI and existence of expanding negative output gap, any rule-based policy would suggest a cut in the policy rate by at least 50 basis points” said Dholakia, according to the MPC minutes published in mid-August.
Dholakia’s dissent is a healthy sign of debate at the RBI committee which was formed in September last year. In June last year, the government amended the RBI Act and formed the committee to make monetary policy instead of the RBI governor doing it alone. As a major reform, the committee were to manage only inflation and not multiple indicators such as exchange rate, employment and growth.
The new law made RBI solely responsible for inflation and more accountable. The formation of MPC was expected to reduce personal biases and external influences that used to impact decisions on rates. Dholakia’s dissent is a sign of rate-setting coming of age in India.