On October 23, 2020, exactly 2 weeks after the announcement of the monetary policy, the MPC released detailed minutes of the meeting. These minutes offer an insight into the thinking and discussions that go behind the monetary policy decision. This MPC meet was also crucial as 3 new members had been inducted just ahead of the MPC meet.
It may be recollected that when the RBI announced the monetary policy on October 09, 2020, there was already a consensus over “no rate cuts”. What surprised the market was the conviction with which MPC underscored that it would keep the monetary policy stance accommodative for as long as required. In the process, the MPC ruled out rate hikes till the end of 2021. Here is a gist of the debate.
Shashank Bhide on the twin factors of growth and inflation
Shashank Bhide of NCAER was one of the new inductees into the MPC. Dr. Bhide pointed out that the MPC decision to hold repo rates at 4% and monetary stance accommodative was based on two premises. Firstly, monetary policy needs help GDP growth to revive. After the (-23.9%) contraction in the Jun-20 quarter, the options were limited.
There is another perspective Dr. Bhide has provided. Inflation is a double-edged sword. It keeps a check on spending and ensures that the supply-driven inflation does not transform into demand-driven inflation. As rates remain low and growth revives, it is estimated that inflation will automatically taper. Bhide voted to hold repo rates at 4% and keep policy accommodative for as long as required.
Ashima Goyal on the tough choice for the MPC
Ashima Goyal of IGIDR was another recent inductee into the MPC. As Goyal summed it up succinctly; for the MPC it was a choice between excess tightness and excess stimulus. Clearly, the RBI preferred the latter despite the inflationary risks. Goyal also pointed out that excessive tightness has a negative impact on financial stability and we have seen that in 2018 when the RBI attempted 2 rate hikes.
She also pointed that the excess liquidity in the system would ensure smooth transmission of rate cuts and cost of funds would anyways come down even without RBI intervening. Any monetary tightness at this point would only disrupt the liquidity driven lowering of rates. Goyal also voted for status quo on rates and sustained accommodation well into 2021.
Jayanth Varma cautious about blank cheque accommodation
The third new inductee into the MPC, Jayanth Varma, is a veteran in capital market regulation. Varma supported the decision to hold repo rates at 4% and also to keep the policy accommodative. However, Varma had reservations about the MPC assuring markets about a timeline for accommodation.
According to Varma, like any prudent central bank, the whole purpose of the MPC meeting every two months was to ensure that all decisions are purely data driven. Giving a tacit assurance of accommodation till end 2021 may amount to signing a blank cheque. Varma has sought a more data-driven approach to monetary policy stance.
Mridul Gaggar puts the slowdown in context
Mridul Gaggar of the RBI observed that GDP contraction has been worse than pessimistic estimates. For example, Q1 contraction at (-23.8%) and the estimated FY21 contraction of (-10.5%) would make India the slowest engine among large economies. Gaggar highlighted that the major trigger for inflation was food inflation and that should taper once the Kharif output comes into mandis.
This year, record food grain production is projected and that should restrain inflation. Hence the focus should be solely on reviving the animal spirits of capitalism. Gaggar not only voted for status quo on rates but also felt that a clear direction on accommodation would make markets less tentative.
Dr. Michael Patra cautions of a second pandemic wave
Deputy Governor, Michael Patra, cautioned that most assumptions of growth are built on the premise that COVID would taper from here on. However, global experience has seen the pandemic recur in a more virulent form. That would call on the government to look at a mix of fiscal and monetary measures to boost growth.
With reverse repo already at 3.35%, the room is limited and hence a status quo leaves some room for manoeuvre in the event of COVID relapse. Also, Patra feels that sustained accommodative stance would give greater confidence to market players and avoid volatility in bond yields. Patra voted for status quo on rates and sustained accommodation.
Shaktikanta Das highlights sequential improvement in high frequency data
The RBI governor has pointed to the improvement in high frequency indicators like IIP, core sector and PMI manufacturing, which are getting back to pre-COVID levels. Das has also expressed his view that any growth triggers could come from rural areas and less from urban areas. However, further rate cuts would not be possible now as the RBI needs to keep some headroom, unlike what the US Fed has done. Das feels that with a major lag effect of COVID expected, promise of accommodation can be the best hedge for markets. Das did not have to cast
the decisive vote since the vote was already 5:0 in favour of status quo on rates and 4:1 on sustained accommodation.
The next monetary policy in December will be able to give more clarity on trajectory with more data points in place.