The MPC minutes of the Dec-2021 policy were announced on 22nd December. It clearly underlined one important fact. Omicron had almost tied down the hands of the MPC and that had triggered status quo on rates and a continuation of the accommodative stance. Despite retail inflation being subdued only due to seasonal factors and WPI inflation shooting through the roof, the MPC did not want to upset the applecart. At least, not with the potent risk of Omicron lurking in the corner.
The 6 members of the Monetary Policy Committee (MPC) had voted unanimously to hold repo rates at 4% and also avoided the temptation of raising reverse repo rates as an ad-hoc measure. However MPC member, Jayanth Varma, was the sole voice of dissent on the accommodative stance. He expressed reservations about a blanket assurance on accommodative stance and wanted it tempered with inflation warnings. Here is the gist of the minutes published by the RBI on 22-December.
Shashank Bhide suggests accommodation as a hedge
Shashank Bhide pointed out that most of the high frequency indicators pointed to a sharp revival in economic growth. He also added that the agricultural growth as well as the growth in merchandise trade had been robust pointing to strong GDP impact. Bhide also expressed confidence in the RBI estimate of 9.5% GDP growth being bettered in FY22.
However, Shashank Bhide has suggested continuing the accommodative policy as a hedge against two major risks. The first is the risk of Omicron, which has been spreading quite rapidly with clear risks to free flow of travel and trade. Secondly, with developed economies moving towards tighter economic policies, India needed to remain as accommodative as possible to ensure that early growth signals were not nipped.
Ashima Goyal highlights fall in inflation expectations of households
Goyal dwelt at length on the inflation expectations of households. As per the RBI estimate of household inflation, the inflation expectations had fallen sharply compared to November. This was due to the sharp cut in fuel taxes, which had not only reduced immediate inflation but also the embedded inflation in other products in the CPI basket.
Goyal felt that with aggregate GDP surpassing the pre-COVID 2019 levels, the onus was to sustain the momentum for the time being. Goyal was of the view that the higher Variable Rate Reverse Repos had effectively pushed up the repo rates much higher than 4%.
Jayant Varma remains unhappy about assurance on accommodation
While Jayanth Varma remained in favour of holding the repo rates, he was not comfortable with a blanket assurance of keeping the stance accommodative as long as required. He maintained his view of August and October that the language would have to be more pragmatic and carrying forward the stance of May 2020 was not the right choice.
While Varma did not suggest raising the repo rates, he felt that as a signal, the reverse repo rates must be raised from 3.35% to closer to 4%. He felt that such a move would also underline the RBI’s seriousness about maintaining price stability. Varma called for the MPC to be more data driven on monetary accommodative assurance and also communicate its seriousness about inflation in its language. Varma was the sole dissenting voice.
Mridul Saggar focuses on the risk of growth probabilities
Saggar has highlighted that headline inflation and core inflation were a potent risk. However, his submission was that the shift to inflation management would be appropriate if there was high probability of growth sustaining. Instead, the Omicron variant had raised a major question mark due to likely disruption in global travel and trade.
Saggar has also highlighted that the month-on-month data has been positive but on most of the high frequency indicators the Indian economy still lagged behind the pre-COVID 2019 levels. He also expressed confidence that if inflation were to escalate, India had the necessary supply side tools to bring inflation under control at short notice.
Dr. Michael Patra suggests caution in the face of extreme uncertainty
Patra believes that in the midst of such elevated uncertainty on the macros, it makes sense to err on the side of caution. It was better to live with the risk of inflation than to live with the risk of growth getting back below 2019 levels. Patra has also pointed out that the Indian economy was treading a path that was in contrast to the global trajectory. Hence a “one size fits all” kind of approach would not work. Notwithstanding global tightening, Patra feels that monetary divergence for India was a risk worth taking.
RBI Governor reiterates the bank’s focus on price stability
The RBI governor pointed out that global uncertainty and volatility was inevitable. However, the accommodative policy had to be continued considering that private consumption in India was yet to bounce back to pre-COIVD levels of 2019. Das has suggested continued accommodative policies to nurture revival in sectors that are lagging and to safeguard business segments that are more vulnerable to emerging headwinds. Das also suggested status quo on rates and policy stance.
The broad theme of the MPC discussions appears to centre substantially around the latest risk factor created by the Omicron variant. The response is somewhere between fear and hope. As they say in cricket, “When in doubt, push out”.