When the announced the monetary policy on 10th February 2022, the expectation already was of status quo. The MPC not only maintained status quo on repo rates and the stance of monetary policy, but refused to hike reverse repo rates as popularly expected. While rising bond yields and a hawkish US Fed were concerns, the MPC chose to focus on more real issues like the pace of recovery, handling the lag effect of Omicron virus, putting contact sensitive sectors back on track etc. Once again, growth concerns ruled the roost.
The 6 members of the Monetary Policy Committee (MPC) voted unanimously to hold repo rates at 4%. Once again, MPC member Jayanth Varma, was the sole voice of dissent on the accommodative stance. He expressed reservations about the blanket assurance on stance. He also underlined that the stance of monetary policy should have shifted to neutral, long back. The one underlying shift in the minutes was that members are increasingly veering towards becoming hawkish. Here is the gist of the MPC minutes and member perspectives.
1. Shashank Bhide focusses on private consumption spending
Shashank Bhide underlined that the first advance estimates (AE) of full year GDP growth at 9.2% was 30 bps lower than RBI estimates. That could be due to the Omicron effect. Bhide justified the rate status quo and continuation of the accommodative stance on the grounds that consumption spending was still lagging pre-pandemic levels.
According to Bhide, geopolitical risk due to developments in the Middle East and Ukraine had added a new dimension to the Indian economy. In these conditions, he considered it unwise to get mentally locked into a hawkish view. Since private consumption still lagged, Bhide wanted to continue current policy with an eye on inflation and growth impulses.
2. Ashima Goyal highlights global oil price risk
Goyal underlined that the incremental risk to the Indian economy could come from global factors like oil prices, imported inflation, global interest policy divergence etc. In addition, the emerging geopolitical risks in Ukraine and its implications for the Indian economy could not be underestimated. However, she was optimistic of full-year inflation at 4.5% for FY23.
Goyal highlighted an important point about overreaction by global bond markets. She felt that the actual Fed policy was unlikely to be as hawkish as CME Fedwatch or bond yields indicated. The spill over effect of Ukraine crisis would impel central banks to be cautious in hawkishness. Goyal voted for status quo as rates may rise less than the market hawkishness.
Jayant Varma once again remained the sole dissenting voice
Jayanth Varma favoured holding rates at 4% but differed on the reverse repo rate levels. More importantly, he felt that the accommodative stance should have shifted to neutral long back. With the economic impact of COVID-19 waning progressively, Varma felt that the argument of growth revival via accommodative policy had outlived its utility. He underlined that India ran the risk of prolonged stagflation; low growth combined with high inflation.
Drawing an analogy with the Feb-20 peak COVID situation, Varma pointed out that the inflation expectations were relatively higher by 100 bps today but the real policy rates were nearly 200 bps lower. The only way to correct this imbalance would be to shift to a neutral policy immediately (although already late). Once again, Varma has cautioned on the distinct risks of a blank cheque on accommodative stance of monetary policy
Mridul Saggar cautions on the shift in global interest rate cycle
Mridul Saggar has been quite vocal about the inherent risks of monetary divergence, i.e. keeping a dovish monetary view when the global cycle was changing to hawkish. Saggar has highlighted that such imbalances were not sustainable and hence the policy must have a game plan to shift its policy rapidly and aggressively when growth returned to the economy.
However, in the interim Saggar feels the risk to capital outflows were real. The underlying twist of Saggar’s arguments are clearly hawkish. Even as he voted for continued accommodation and low rates, Saggar has highlighted the need to maintain a flexible monetary response mechanism that is sensitive to sudden shifts in global macros. These changes can also be made outside the ambit of routine monetary policy.
Dr. Michael Patra bets on inflation inflection point
Patra made an interesting observation in his statement. According to Patra, it is accepted that inflation has been higher than expected for a prolonged period. It is also accepted that the inflation is more supply-driven than demand-driven. Hence there may not be too much merit in trying to control inflation by raising rates, as it may end up killing economic growth. Shaky geopolitics, rising inflation and monetary divergence were risks; but Patra holds the view that inflation was nearing an inflection point and should turn around to lower levels.
RBI Governor reiterates the bank’s focus on price stability
The RBI governor, Dr. Shaktikanta Das, underscored that across the world there was growing divergence between growth and inflation. Some economies were more resilient compared to others while others have been less vulnerable to inflation. In a way, the RBI governor is right when he says that it would be better to react to the emerging global situation as it comes. That is better than trying to work based on projections of extraneous parameters where India has little control. He felt there was no pressing need to change the stance.
There are 3 things that emerge from the minutes of the MPC meet. Firstly, there is a growing acknowledgement of the risk of rising rates. Secondly, geopolitics is the new X-factor, that did not exist in previous policies. Lastly, RBI would prefer to be flexible and react quickly, rather than try and project macro trajectories. That seems to be a wise thing to do.