The six members of the Monetary Policy Committee (MPC) were unanimous about holding repo rates at 4% and even eschewed the temptation to raise the reverse repo rates as an ad-hoc measure. However, like in the previous MPC meet, Jayanth Varma had reservations about a blanket assurance on accommodative stance and wanted it tempered with astute and adequate inflation warnings. Here is the gist of the minutes.
Shashank Bhide stays dovish but warns of inflation risks
Shashank Bhide pointed out that disruption of COVID 2.0 had been lesser in intensity and even shorter in tenure compared to COVID-19. Also, most high frequency indicators were pointing towards a genuine recovery in growth. That was also corroborated by the overall core sector and IIP moving above pre-pandemic levels.
However, Shashank Bhide is of the view that the MPC must give more time for the supply chain constraints to resolve before attempting any change in stance. His concern on inflation was that external factors like crude, coal and other commodity prices could push up producer inflation. These factors are less controllable. Bhide has also added the caveat that the focus should also remain on reining in inflation.
Ashima Goyal highlights need to analyse core inflation intensely
According to Goyal, growth bounce has been along expected lines with fall in COVID cases and the progression of vaccination program. However, Goyal is wary that core inflation may have a supply chain component and a structural component. Supply chain issues are reversible while structural issues are not. The need of the hour is to focus on granular core inflation than on headline inflation.
Goyal justified her accommodative stance vote on the grounds that pent up demand may be ephemeral and may vanish post festival season. She also points out even a subdued resurgence of COVID carries a systemic risk for output. She wants accommodative stance to continue even at risk of global monetary divergence.
Jayant Varma unhappy about assurance on accommodative stance
Jayanth Varma voted to keep repo rates at 4%, but pointed out some critical issues. Firstly, he thinks monetary policy may have outlived its utility for now. Secondly, Varma feels that green energy drive could create supply shocks in fossil fuels, driving oil and inflation higher. Inflation had been a lot more persistent that envisaged.
Varma believes that the repo rate of 4% translates to negative real rate of -1.5% if inflation expectations are factored in. As an intermediate solution he wants the reverse repo rate raised from the current level of 3.35%. As usual, Varma also highlighted the need to be data driven, rather than assurance driven.
Mridul Saggar warns about the risks of premature tightening
Saggar has pointed out that while growth has been recovering, it has hardly been broad-based. For example, 55% of the sectors are below 2019 levels of output, which means the recovery is top-heavy. The best the MPC can do at this stage is to ensure that consumption demand is robust in the midst of tentative growth signals.
Saggar focuses on the delicate topic of premature tightening. It is a choice between the devil and the deep sea. Saggar feels it is OK to live with negative real rates for some time, if the situation promises to reverse in the medium-term. Indirectly, Saggar has also supported monetary divergence, despite risks to capital flows.
Dr. Michael Patra calls for close tab on global factors
Patra has rightly pointed out that the big risks in the coming months could come from global factors. These include systemic factors like the Evergrande crisis, global power crisis, commodity inflation, COVID resurgence etc. Quarterly results have also pointed to top-line growth combined with cost pressures hitting profits. In short, the strategy of focusing on consumption demand looks to be the best choice at this point of time.
RBI Governor reiterates the bank’s focus on price stability
When MPC members are in consensus or close to consensus, the governor’s vote is not needed. However, Das has made some interesting points. Firstly, demand is bouncing back but supply chains are restricted. That is boosting inflation. Secondly, the governor has made an important point that the RBI would be committed to keep inflation low and that is a signal that the reversal in this accommodative stance may happen sooner than expected.
The broad theme of the MPC discussions were that while growth continued to be the overarching theme, there was the need for closer inflation tracking, and this has been reiterated by no less than the RBI governor. That is saying a lot!