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Interesting to see how MPC will tackle monetary policy: Fitch

RBI5By Meghna Mittal,

New Delhi, (IANS) : A day before the Reserve Bank of India announces 2016-17’s fourth monetary bi-monthly policy, rating agency Fitch said it is waiting to see how the newly-formed Monetary Policy Committee tackles it, hinting that a low inflation targeting could positively impact the country’s rating.

“The inflation targeting framework now in place, should reduce the impact of pressures, but it will be interesting to see how this will play out in the Monetary Policy Committee (MPC), in which members appointed by both the government and RBI, will have a vote on monetary policy,” Thomas Rookmaaker, Director, Asia-Pacific Sovereigns Group, Fitch Ratings, told IANS.

“Structurally low inflation would positively impact the sovereign rating profile as it would improve the investment climate and, hence, contribute to sustainable growth,” he added.

Fitch implied that it expected no rate cuts with a focus on containing inflation in Tuesday’s policy, which will be also the first under the leadership of new Governor Urjit Patel.

“The fact that Dr. Patel has served as deputy governor in the past three years, suggests continuation of the current policy direction in the years ahead. Dr. Patel was part of the team at RBI that set in motion significant policy changes to deal with both high inflation and weak bank balance sheets, including through the set-up of new policy frameworks,” Rookmaaker told IANS in an e-mail interview.

The elevation of Patel has raised expectations among those who were critical of his predecessor Raghruam Rajan for not easing enough the monetary policy by cutting rates, though Patel’s moorings are as monetarist and he is considered to attach the same importance to inflation control.

The MPC, which is now tasked with the job of taking a call on the interest rates, would theoretically target the range around the mid-point and not one of the outer points specifically, though it was early to tell if inflation in practice will remain skewed to one side of the range, Rookmaaker said.

The government has set an annual inflation target of four per cent, plus or minus two percentage points.

“The inflation target range that the RBI will use in the medium term seems rather broad, in the sense that 2 per cent seems quite low and 6 per cent quite high for an emerging economy like India. But it seems to make sense to have a rather broad range around the 4 per cent mid-point, as food and oil price movements can have a large impact on headline inflation,” Rookmaaker said.

Wholesale food price inflation was 5.3 per cent during financial years 1996 to 2005 but increased to 9.2 per cent between financial years 2006 and 2016. Clearly, the fight on the inflation front, particularly food inflation, is far from over.

(Meghna Mittal can be reached at meghna.m@ians.in)

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