Key Takeaways from the Minutes of the MPC

The minutes of the Monetary Policy Committee (MPC) meeting on December 06^th and 07^th culminating in the credit policy announcement had voted in favour of a status quo on rates. According to the minutes released on 21^st December, there was complete unanimity among the 6 members of the MPC on the need to maintain status quo on repo rates. The decision to maintain status quo on rates was largely driven by the uncertainty surrounding the full impact of demonetization as well as the rather sticky behaviour of non-food inflation. This was later ratified by the November CPI data where the CPI inflation came in at 3.63% despite food inflation coming in at just 2.11%. Captured below is the gist of the observations and analysis of each of the 6 members of the MPC.

Perspective of Dr. Chetan Ghate…

According to Dr. Ghate, the vote for status quo was largely driven by lack of data to examine the economic impact of demonetization. While intuitively there was a shortfall in demand and reports coming from the field also suggested the same, there was no real hard data to support and quantify the extent of economic slowdown. Dr. Ghate has dwelt at length on the stickiness of non-food inflation, which has continued to go up notwithstanding the easing base effect. He believes that the reversal in the price cycle of non-food items like metals and oil bring huge upside risks to CPI inflation overall. Hence going by food inflation alone may risk missing the real story. Dr. Ghate has also expressed concerns over the transmission of rate cuts since only 71 bps out of the 175 bps rate cut since Jan 2015 was actually passed on. His view was that at the current juncture, expecting sharper transmission was not practical. Dr. Ghate had voted in favour of a status quo.

Perspective of Dr. Pami Dua…

Dr. Pami Dua was of the view that the impact of the demonetization may only be temporary and hence that could not be a justification for a repo rate cut. The impact on growth due to demonetization was unlikely to be serious enough to warrant a compensatory rate cut. Dr. Dua has also dwelt on the uncertainty over the outcome of the Fed meet in mid-December. It needs to be remembered that when the monetary policy was announced, the Fed rate hike announcement had not been made, although it was popularly anticipated. According to Dr. Dua, the uncertainty over the US Fed trajectory warranted status quo on rates in India to maintain the yield differential over the US. Dr. Pami Dua also voted in favour of a status quo on rates.

Perspective of Dr. Ravindra Dholakia…

Apart from sticky non-core inflation, Dr. Dholakia had an interesting perspective to offer. Demonetization had created a huge gap between notes impounded and fresh notes issued. As a result, banks were flush with liquidity. According to Dr. Dholakia, this surplus liquidity with banks was anyways likely to drive lending rates lower. That would be a more potent driver of lending rates than the signals given by the RBI through the repo rates. Hence Dr. Dholakia was of the view that a rate cut may not really add value at this juncture and must be preserved for a future date.

Perspective of Dr. Michael Patra…

Dr. Patra has dwelt at length on how the global economic and political risks impact the Indian economy. The Fed trajectory combined with Trump’s election had created a new set of international economic and political risks with long term implications for the Indian economy. According to Dr. Patra, the real import of all these global risk may be apparent only after Mr. Trump takes charge in January and rolls out his grand economic plan. In the light of the OPEC meeting on supply quotas, Dr. Patra has also pointed out the upside risks to CPI inflation due to the multiplier effect of crude oil prices. This is all the more acute considering that India relies on oil imports for over 75% of its oil consumption needs. Dr. Patra also voted for a status quo.

Perspective of Mr. Gandhi…

Mr. Gandhi’s perspective obviously carries weight as he provides the insider view to monetary policy with his in-depth understanding of the nuances of India’s monetary policy and its larger economic ramifications. Mr. Gandhi has focused on the all important question of when the RBI must act. In the current environment of economic uncertainty, the big risk according to Mr. Gandhi is that transmission lags may defeat the very purpose of monetary policy. The focus in the current situation of economic uncertainty must be to consolidate on the economy strengths rather than to try and spur growth through lower rates. Mr. Gandhi also voted in favour of a status quo on rates.

Perspective of the RBI Governor, Dr. Urjit Patel…

Dr. Urjit Patel has focused on the RBI’s primordial objective of inflation management. According to Dr. Patel, there are distinct upside risks to inflation in the form of higher oil prices, liquidity with banks and the full impact of 7CPC and OROP. Dr. Patel is also cautious of the fact that inflation was moving upwards in most advanced global economies and Indian inflation may eventually follow suit. The governor’s vote also was for a status quo on rates.

The minutes of the MPC make it clear that the primary driver for the status quo on rates was inflation risk and the uncertainty created by the demonetization exercise. The X-factor, of course, remains the future trajectory of the US economy!