RBI Policy: Why MPC changed monetary policy stance to neutral

 "The Committee remains committed to bringing headline inflation closer to 4.0 percent on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky," the central bank said in a statement. In the sixth bi-monthly monetary policy committee (MPC) meeting for FY17, the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.25 percent and changed its outlook from accommodative to a neutral. "The Committee remains committed to bringing headline inflation closer to 4.0 percent on a durable basis and in a calibrated manner. This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky," the central bank said in a statement.

 "The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out," it added. RBI said that inflation is edging up on the back of rising energy prices and a mild firming up of demand. "Global trade remains subdued due to an increasing tendency towards protectionist policies and heightened political tensions. Furthermore, financial conditions are likely to tighten as central banks in advanced economies (AEs) normalise exceptional accommodation in monetary policy," the release said. Listing the intent behind the outlook shift from accommodative to neutral, RBI governor Urijit Patel said that the main reason for this shift is because the committee wanted to emphasise that in a calibrated manner and on a more durable basis move closer to the 4 percent inflation mark. Secondly, the non-food, non-fuel part of the CPI index has been stubborn at 4.8-4.9 percent since September, 2016 and therefore due to such kinds of risks and various other uncertainties the committee felt it need all the flexibility that it could muster, he added.

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