After all, inflation was showing no signs of relenting and the US Fed was as hawkish in action, as it was in its statements. The September 30th MPC marked the third consecutive 50 bps repo rate hike by the RBI. RBI has now hiked rates by 190 basis points since May 2022, one of the quickest bouts of hawkishness in memory. However, a finer reading of the minutes of the meeting indicate that not all the members were in sync about the rate hike, with Ashima Goyal even hinting at global overreaction to inflation. Ashima Goyal voted against the 50 bps rate hike.
Between the time the policy statement was announced on 30th September and the minutes were announced on 14th October, there were some key data points. For instance, CPI inflation came in sharply higher at 7.41% while IIP growth dipped to a negative -0.83% for the latest month of August 2022. If one were to sit back and analyse the impact of the RBI hawkishness, it has resulted in weak industrial growth, sent the rupee on a downward spiral while offering little respite on inflation. It may be too early to change the hawkish policy stance but the way rates have hit growth, without soothing inflation, is worth a detailed debate. That was the crux of the minutes of the Monetary Policy Committee meeting.
1. Shashank Bhide highlights significant uncertainty in growth trajectory
The statement by Bhide shows real concerns over falling growth momentum. He has admitted that the growth triggers have slowed across the world with economies like the US, UK and Europe staring at a recession in next 12 months. Bhide has also admitted that the way growth has been losing momentum, it may be tough to even meet the RBI full year target of 7.2%. In short, the impact of all the hawkishness has been felt on inflation to a marginal extent, but the damage to growth has been substantial.
Despite the rather grim predictions on growth, Bhide opted to vote for a 50 bps rate hike. A change in the hawkish stance would only make sense if inflation started moving lower in the direction of their 4% eventual target. His main point was that, for growth to sustain consumer demand had to bounce but that would only happen if there was price stability. While voting for a 50 bps rate hike, Bhide has also expressed surprise at the fact that inflation expectations went up since July 2022, despite the RBI staying hawkish.
2. Ashima Goyal calls it the global overreaction to inflation
Ashima Goyal summed up the global fight against inflation as first an overstimulation post COVID and then an overreaction to inflation. Goyal made an interesting point that giving too much of a forward guidance leads to unnecessary volatility. Today the Fed and even the RBI, to some extent, had indirectly given a hawkish guidance; well into the future. She preferred to take macros on a case by case basis and be data driven, rather than guidance driven.
Goyal feels that the RBI must take the initiative to signal to the market that inflation had started tapering. For example, when global commodity prices fall, the primary impact is felt on WPI inflation and CPI inflation is a secondary impact. The sharp fall in WPI inflation in the last few months is signal that the efforts are working. According to Goyal, the RBI should restrict itself to a 35 bps rate hike, which would be a strong signal to the market and also help to tone down inflation expectations.
3. Jayant Varma suggests a pause at 6% repo rate levels
While Jayant Varma has been a votary of attacking inflation head on, he is now of the view that it was time for the RBI to take a pause and rethink. For instance, the RBI had already hiked the rates from 4% to 5.90% since May 2022. while the indicative terminal rates may have gone up from 6% to 6.5%, Varma feels the RBI should take the repo rates to around 6% and then take a pause. It needs to give time for all the hawkishness of the last few months to show its impact on retail inflation and also on real GDP growth.
Varma has cautioned that it may not be a good idea to push the repo rate much beyond the neutral rate, especially when growth was so fragile. Giving analogies of 1998 and 2013, Varma pointed out that those were India specific concerns, but the current situation is a global disruption. Hence the strategies of the past may not work and just raising rates may not translate into flows and strengthen the rupee. Varma broadly concurred with Goyal that it was time to pause, rather than try and push more rate hikes or tightening at this juncture.
4. Rajiv Ranjan suggests persisting with hawkishness
According to Rajiv Ranjan, despite concerns over heavy growth impact and little inflation impact, RBI should persist with its hawkish stance. Ranjan feels that the growth impact seen in the last few data points was more due to lower government spending and weak exports due to global headwinds. Consumption spending has been robust and that should help India sustain GDP growth of close to 7% for the full fiscal year FY23.
Ranjan also pointed out that, rate hikes impact inflation with a lag since the transmission effect has to work. He has suggested a 50 bps rate hike and persisting with the fight against inflation, since India had the leeway of above average growth.
5. Michael Patra talks of loneliness in macroeconomic policy
Patra has underlined that the monetary policy still needs to play the role of an economic anchor. Hence, any let up in the RBI fight against inflation would only worsen inflation expectations. Patra has made an interesting point that while global influences were real, macroeconomic policy and monetary policy were areas were the RBI had to remain a lonely figure. Decisions have to be taken purely on internals. He expects lower inflation to eventually steer real GDP growth. Patra voted for a 50 bps rate hike and a hawkish stance.
6. RBI Governor focuses on stability of balance sheets
The RBI governor, Shaktikanta Das, has reminded the markets that even if we leave aside the India growth story and its resilience, one cannot dispute that Indian banks are much stronger and corporate balance sheets are substantially deleveraged. That gives Indian economy the firepower to bounce back to growth much quicker when the tide turns. Till then the focus will have to be to persist with inflation control. As Das rightly put it, we can only deal with the variables we control and repo rates are one of them.
There are 3 takeaways from the MPC minutes. Firstly, the RBI may be close to peak rates and we could see a pause, if not a shift in stance. Secondly, most of the growth concerns are due to faltering exports, which is due to global headwinds. Lastly, optimism is a good breakfast but a bad supper. That is something the regulators must keep in focus.