MPC minutes hint at low rates but price stability could gain importance

Broadly, the MPC lauded that food prices had come down and the $400 billion stimulus had put the economy on a firm growth path.

Feb 23, 2021 07:02 IST India Infoline News Service

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The minutes of the 05-Feb Monetary Policy discussions were published on 22-Feb. These minutes give insights into the actual discussions among the MPC members. In the 05-Feb policy announcement, the MPC had unanimously voted to keep repo rates at 4% and policy stance accommodative as long as required to boost GDP growth. After a sharp fall in CPI inflation in Dec-20; it tapered further in Jan-21, vindicating the accommodative stance.

Broadly, the MPC lauded that food prices had come down and the $400 billion stimulus had put the economy on a firm growth path. However, while food inflation came down sharply, fuel inflation and core inflation remain high. Also, monetary and fiscal levers may be limited going ahead. That is why the member-wise deliberations assume importance.

Shashank Bhide dwelt on achieving GDP potential

According to Shashank Bhide, the early indications from GDP growth and corporate results are that the recovery in manufacturing was more robust than services. Services continue to face the lag effect of the pandemic. According to Bhide, the only way to ensure that manufacturing and services catch up with agriculture is via low rates and ample liquidity.

Some of the recovery in the first two quarters may be attributed to pent-up demand and festive cycles. Hence, Q4 demand patterns will be more indicative of sustainable recovery. He underlined the need for accommodative policy due to weak consumer confidence. Bhide voted for status quo on rates and accommodative monetary policy.

Ashima Goyal calls pre-COVID GDP levels the first priority

Goyal pointed that although recovery in growth was robust on a sequential basis, absolute output was yet to touch 2019 levels. That should be the first priority and it called for low rates and accommodative monetary stance. Goyal pointed out that more than recovery in the corporate sector, recovery in informal sectors of the economy was more material.

Goyal spoke of two immediate priorities. The first is to bring core inflation close to the long-term average of 4%. The second priority is to improve capacity utilization in Indian manufacturing sector for better economies of scale. These had to be supported with an accommodative policy stance. Goyal also voted for status quo on rates and continuation of accommodative stance into the foreseeable future.

Jayant Varma continues to prefer data-driven approach

As has been his wont, Jayant Varma continues to be wary of giving long range accommodative projections. He felt such decisions should best be data-driven rather than guiding into a time frame of 12-18 months as the Fed had done.

Varma believes that more than setting rates, the RBI must focus on tweaking yield spreads between short-term and long-term maturities using TLTRO. Varma preferred status quo on repo rates and stance, but underlined that future decisions must only be data-driven.

Mridul Saggar underlines that counter-cyclical approach was risky

Mridul pointed that an accommodative guidance when inflation was 7.6% was a brave decision, which eventually worked. Saggar underlined that the sole intent was to support business sentiments and did not adhere to the book. He has advised a more caution in the road ahead.

Dr. Saggar believes that upsides risk to inflation could arise from crude oil prices and the continued supply chain constraints which is reflected in core inflation. While lauding the recovery in manufacturing, Saggar has pointed that service sector must grow for GDP to show traction. While supporting status quo on rates and accommodative stance, Saggar underscored that price stability focus cannot be forsaken for long.

Dr. Michael Patra and the growth-inflation trade-off

Patra best summed up the stance of the MPC as a well thought out trade-off. According to Patra, the MPC decision was a trade-off about what is the bigger near-term risk. While a spike in inflation remains a risk, the bigger risk was growth recovery in the near term. Purely from that perspective, Dr. Patra voted in support of static repo rates and accommodative monetary stance.

RBI Governor paints an optimist economic picture

Shaktikanta Das has pointed out that the Indian economy flattered on the growth recovery and inflation front. He also pointed to the sharp recovery in foreign portfolio investments and the positive market reaction post the Union Budget announcement. The export driven companies are likely to benefit from IMF raising global growth projections and hence continued accommodation would be the need of the hour.

Das pointed that high-frequency data points like railway freight, air traffic, GST collections, steel consumption and e-way bills were picking up sharply. Hence Das underscored the need to remain accommodative and also communicate the accommodative intent to the industry.

The big story seems to be the quest for durable long-term growth and that calls for an accommodative policy. There are enough indicators from the RBI that monetary accommodation cannot be a blank cheque. It will have to come with price stability conditions in the future. The time frame, is still, a matter of conjecture!

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