The MPC minutes are significant as they reveal the thought processes that have gone in when the members have taken a decision on rates and stance. This is a progressive move in transparency as one gets to read about the arguments on both sides. Given that economists are known to have varying views on how the economy will turn out, it is but natural that reaching a consensus is always a challenge. Yet, ever since the MPC was constituted, there has generally been a consensus and there has never been a case of an even number for both the sides of the argument, which would have led to the governor exercising his prerogative.
The minutes of the last monetary policy are interesting as there is unanimity on the repo rate, but not the stance. This was also the opinion in the earlier policy too, with one of the experts having a different view on the stance. However, the commentary made by the dissenting expert is interesting.
There have been some interesting comments made by one of the independent members which send mixed signals. In fact, when going through the statements made by way of his opinion, certain questions are raised. This is something which can puzzle the market as the view taken on both inflation and growth seems rather unclear.
The member starts by saying that the outlook on inflation and growth has changed only marginally since the last policy, which can be interpreted as being a good sign. More significantly, it is stated that the two concerns which were highlighted by the member in the last policy are less important today. One is crude oil matrix and the other monsoon prospects.
For oil, it is argued that there are few chances of any spike in the price in near term based on the evolving dynamics of the market. In case of monsoons, there is less concern on any adverse impact on the economy though the weather department has projected even chance both ways.
Against this background, it has been logically concluded that the situation does not warrant a change in the repo rate which was also the majority view. More specifically, it is argued that the present level of repo rate is good enough to ensure that inflation will be below the thresholds that the MPC has to protect and will also drive it towards the middle part of the band. This gives the impression that all is under control. However, there is a caustic statement made subsequently that he is not comfortable with the ‘self-congratulatory tone’ in the MPC statement on inflation. Here he again points to significant risks to both inflation and growth.
Hence, the member blows hot and cold over whether the economy is now comfortable with growth and inflation. This goes counter to the statement that the two major risks highlighted relating to the oil prices and monsoon are not really significant. Now this can be interpreted as there still being risks to inflation in which case there could be an argument for raising rates further. But doing so would also mean that it will come in the way of growth, which is something on which other members too have opined their reservations. Therefore there are mixed signals here on whether the worst of inflation is over or not.
Further, the member also seems to be critical of the stance of withdrawal of liquidity which he probably alludes to being unclear as he refers to it as ‘whatever that phrase may mean’. This has been the view taken even in the past meetings and hence there may be reason for the MPC to explain the meaning in more definitive terms. Is it a case of surplus liquidity in the system that needs to be drawn out? Or is it a case of real interest rates being high or low or appropriate? At any rate the view was that the stance was disconnected with reality and by maintaining the same ‘it can inflict significant damage to the economy’. The reason presumably is that a real repo rate of 1.5% can come in the way of the growth process.
But, it was seen in FY23 that the high interest rates did not quite stifle growth which came in at 7.2%. Therefore, the continuation of the stance of withdrawal of liquidity cannot really impede growth. A stance is not an action like a repo rate hike or cut but a signal to the market on how the central bank or rather the MPC thinks the economy will behave. At the ground level the market looks at it as a prelude to a change in the position on repo rate.
The RBI’s position, on the other side, however, is quite unambiguous on the subject where the interpretation is that inflation though under control has to be monitored as the El Niño in particular can create disruption. Liquidity is still in surplus and there is some time to go before inflation will come down to 4%. Therefore a rate pause to gauge how the 250 bps rate hike has worked out is pragmatic.
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