The MPC minutes give a granular view of what each of the six members of the MPC had to say and how the rate decision was arrived at. It was already documented in the monetary policy that the 6 members unanimously voted for holding the repo rates at 4%. Here is a quick take on why the MPC voted decisively to hold rates; at the same time voting for an accommodative monetary stance.
Dr. Chetan Ghate – Growth rebound still mechanical
The markets were expecting an indicative rate cut of 25 bps in the policy since the MPC had committed itself to reviving growth rather than worry about inflation. Explaining the reason for the status quo, Dr. Chetan Ghate, Professor ISI, outlined that the bounce in the last couple of months was purely mechanical and was from a low base. Hence, evidence of the impact of rate cut on growth was still not there. Dr. Ghate pointed out that credit growth remained muted despite 115 bps rate cuts in 2020. The negative demand and supply shock of COVID was far from over and hence it may be better to wait till the output starts to normalize. Dr. Ghate voted for status quo on rates and accommodative monetary policy.
Dr. Pami Dua – Food inflation remains the barrier to rate cuts
The former director of the Delhi School of Economics pointed out that food inflation at above 8% remained sticky and uncomfortable. Dr. Dua also pointed to non-core inflation hovering close to the 5% mark in June; incidentally it touched 5.9% in July, validating her concern. Considering the supply chain shocks in the agricultural sector, Pami Dua was of the view that it would be better to wait for inflation to come under control post Kharif harvest. The moot point is whether food inflation would moderate if supply bottlenecks remained. Dr. Dua voted for status quo on rates and accommodative monetary policy.
Dr. Ravindra Dholakia – Real GDP growth may be overstated due to inflation
The former director of IIM Ahmadabad believed that both; low growth and high inflation were key factors in the rate status quo decision. Dr. Dholakia’s concern was that abnormally high inflation could lead to overstated GDP data as the deflator did not capture high frequency inflation data. The effective real GDP growth would actually turn out lower than what the data showed. Dr. Dholakia also pointed out that it would be better to wait for the second quarter data on industrial growth; wherein the RBI Industrial outlook expects some improvement. That would mean putting off rate decision to December policy.
Dr. Mridul Saggar – Monetary policy in the midst of uncertainty
As an RBI insider, Dr. Saggar pointed out that the biggest risk of taking a view on rates at this juncture would be the insufficient data points. In the current macroeconomic context; everybody was working with incomplete data and relying on the validity of assumptions. While contractions were getting smaller, Dr. Saggar pointed that it was little consolation as the purpose was to see real growth in GDP. Considering the uncertain environment Dr. Saggar also voted for status quo on rates.
Dr. Michael Patra – Liquidity may have built inflationary pressures
RBI deputy governor, Dr. Michael Patra, pointed out that over the last six months; policymakers had focused overtly on growth at the cost of inflation. However, inflation had remained sticky despite demand weakening. Dr. Patra was of the view that high inflation is driven more by a surfeit of liquidity in the system and so inflation may not come under control even with a good Kharif output. According to Dr. Patra, the growth outlook remained grim. The experience of the US had demonstrated that rate cuts and liquidity can only work to a point. Dr. Patra also voted for status quo on rates.
Dr. Shaktikanta Das – Using rate cuts judiciously
With the vote for status quo on rates and an accommodative stance being decisive, the governor’s vote was really not required. Dr. Das underlined that RBI had cut rates by 250 bps since the beginning of 2019 and rates were at 20-year lows. In addition, RBI had infused liquidity to the tune of Rs957,000cr into the system, accounting for 4.7% of GDP. Considering the output pressures and an expected GDP contraction, Dr. Das felt the economy needed more time to absorb the liquidity. Also, the RBI did not want to exhaust its tools to regulate the monetary system. That justified status quo on rates.
Summing up the views of the MPC, it looks like the MPC may choose to even wait out the October policy since the second quarter data points will not be available by then. The real onus of MPC policy literally shifts to December 2020.