RBI-MPC Minutes

As is the normal practice, the Monetary Policy Committee published its minutes of the discussion leading to the Monetary Policy on 08th February. It may be recollected that in the Feb 08th policy, the MPC had chosen to maintain status quo on rates. This was contrary to market expectations as the equity and bond markets had almost factored a repo rate cut of 25 basis points. What was more disconcerting for the markets was that the RBI had also explicitly shifted its monetary stance from “Accommodative” to “Neutral”. Here are the key highlights of the MPC minutes announced on Feb 22nd and the key discussion points put forth by each of the 6 members of the MPC…

 

Perspective of Dr. Chetan Ghate…

 

Dr. Ghate has focused on the fact that the negative impact of demonetization has not been as much as was originally anticipated. On the one hand, the actual impact of demonetization was restricted to certain sectors like construction, cement, FMCG, automobiles etc. On the other hand, the government has started aggressively remonetising and that is likely to ensure that the impact on output is not substantial. Dr. Ghate was of the view that the logic of pump priming output through rate cuts was, therefore, not applicable in the current scenario. Dr. Ghate has also pointed to a risk on the global front. The US Fed proposes to stop reinvesting principal payments which will tantamount to balance sheet reduction by the Fed. This will be similar to the taper undertaken in 2013, although the impact may not be that serious. Dr. Ghate voted to maintain status quo on rates.

 

Perspective of Dr. Pami Dua…

 

Dr. Dua was of the view that the glut of funds with the banks in the aftermath of demonetization had forced most banks to aggressively cut their MCLR rates. This has resulted in more than 100% of rate cuts since Jan 2015 being transmitted to the end customer. This actually obviated the need for further rate cuts in this policy. Additionally, the remonetization had begun in right earnest and that would be sufficient to take care of a rebound in output. Dr. Dua also pointed out at the big global risk of at least a couple of rate hikes by the US Fed in the current calendar year. Cutting repo rates in this situation may open up the risk of capital outflows, with its concomitant impact on the INR and the overall markets. Dr. Dua also voted in favour of maintaining status quo on repo rates.

 

Perspective of Dr. Ravindra Dholakia…

 

Dr. Dholakia provided the much needed academic perspective to the entire repo rate debate within the MPC. Dr. Dholakia has raised his traditional concerns over state deficits. According to Dr. Dholakia, while the central fiscal deficit is being kept in check by the FRBM, the state fiscal deficits are shooting out of control. Today the states’ share of the overall fiscal deficit has become more critical than the central share and till that is clearly known, it will be better to play safe when it comes to following an accommodative monetary policy. Dr. Dholakia was also of the view that the real economic growth will come about as an automatic response to remonetization and hence any fillip from the RBI side may not be required. Dr. Dholakia also voted in favour of maintaining status on repo rates.

 

 

 

Perspective of Dr. Michael Patra…

 

In fact, Dr. Patra has been one of the key proponents of changing the stance of the RBI from an accommodative stance to a neutral stance. Firstly, Dr. Patra believes that the current fall in CPI inflation was largely driven by vegetables and pulses which were transitory and not sustainable. Secondly, Dr. Patra strongly believes that the remonetization thrust over the next few weeks may be instrumental in pushing up inflation and the monetary policy needs to be prepared for that. Thirdly, Dr. Patra has also cautioned that the big oil and commodity dividends that accrued to India between 2014 and 2016 may not be sustainable much longer and the spill-over impact on inflation in India cannot be underestimated. In fact, Dr. Patra has not only voted to hold rates at 6.25% but has also urged the RBI to shift its monetary stance from “Accommodative” to “Neutral”.

 

Perspective of Dr. Viral Acharya…

 

The perspective of Dr. Acharya becomes important for 2 reasons. Firstly, he is a recent appointee to the RBI board and hence brings a critical outside perspective to the debate. Secondly, as an RBI insider, his views are likely to be most aligned to the broad policy thinking. In fact, Dr. Acharya has admitted that the final decision to hold rates at 6.25% entailed a difficult trade-off between inflation and growth. Dr. Acharya also pointed out that the deflation in food prices was entirely seasonal and hence it may not be advisable to take a long term rate decision based on a seasonal pattern. Dr. Acharya has also highlighted the risk of large economies like the US getting increasingly protectionist. In these conditions, India could ill-afford any surge in capital outflows; especially if that was triggered by a premature rate cut. Dr. Acharya also voted to hold rates at 6.25%.

 

Perspective of Dr. Urjit Patel…

 

There was already a consensus on not cutting rates among the other members of the MPC. To a large extent the RBI governor’s views mirrored that of the members of the MPC. Apart from his concerns over inflation risk, Dr. Patel felt that it was time for the RBI to seriously consider greater flexibility in interest rate management. Currently, the assumption is that the RBI will either maintain status quo or cut rates. What Dr. Patel has tried to prepare the markets and the economy through the policy is to also be open to the possibility of rate hikes from here on. While they do not appear to be a plausible option right away, Dr. Patel has highlighted that if the inflation goes out of control in the short run, then a rate hike cannot be ruled out if it was essential to bring CPI inflation closer to the long term target of 4%.

 

The consensus was visible for the third MPC meeting in succession where the members have been unanimous over the rate decision. However, this policy marks a major shift wherein the RBI governor himself has cautioned the markets to be prepared for rate movements either ways. Whether that signals the end of the rate cut cycle; is something only time will tell!