What is the difference between an “Accommodative” stance and a “Neutral” stance in the monetary policy?
In the last few policies there are times the monetary stance has been “Neutral” and at time it has been “Accommodative”. These are supposed to be important cues for the bond and money markets. An accommodative stance means that the RBI is worried about weak growth in GDP and IIP, and hence, commits to keep repo rates either at the same level or lower. A neutral stance means that the RBI keeps the option open of either cutting rates or raising rates based on data flows. Normally, before RBI hikes rates, it gives advance signals by shifting stance from neutral to accommodative. This is a caution to bond markets.
Who constitutes the Monetary Policy Committee (MPC) and what role does the MPC play? Is it different from the RBI?
Monetary Policy Committee (MPC) was constituted in late 2016. Till then, the rate decision was taken at the sole discretion of the RBI governor. To give more objectivity to the policy framing process and also incorporate the Finance Ministry point of view, the MPC was constituted. MPC consists of 6 members of whom 2 members include the RBI governor and one senior RBI official (deputy governor or ED rank). The other four members are eminent economists from academia or the Finance Ministry with in-depth grasp of economics and the functioning of the economy. The MPC meets over 3 days to debate the monetary policy and the rate decision is finally put to vote. The RBI governor is not required to vote, except if the committee is divided and the deciding vote has to be cast.
What are the factors that MPC considers when taking a decision on repo rates?
The MPC considers a host of specific factors and then takes a combined view on whether to hike rates, cut rates or maintain status quo. Here are key factors the MPC considers.
- CPI Inflation and inflation expectations
- Monthly IIP growth and Quarterly GDP growth
- Agriculture output, monsoons and reservoir levels
- Trade data - imports, exports and trade deficit
- PMI Manufacturing and PMI Services
- Overall liquidity and transmission
- Real rates and impact on foreign portfolio flows
What are the MPC minutes and how to read and interpret the minutes of the MPC meeting?
The monetary policy statement is announced at the end of the 3-day meeting of the MPC. However, the policy statement only covers the conclusions of the committee and does not provide deep insights into the discussions and debates among the MPC members. For example, some members may have agreed to a rate cut with conviction, some with scepticism and some conditionally. These finer aspects are revealed in the MPC minutes. Normally, the MPC minutes are published on the RBI website exactly 2 weeks after the policy announcement. For example, for the policy announced on February 06, 2020, the minutes will be published on February 20, 2020. These minutes give better insight into how members could vote in the next policy meeting.
How does the RBI policy propose to incentivize loans to auto and real estate with the use of CRR?
As you are aware the cash reserve ratio (CRR) is maintained by all commercial banks at 4% of the net demand and time liabilities (NDTL). For a bank, the current, savings and time deposits are liabilities and loans given are assets. NDTL is calculated by deducting some eligible assets from liabilities to determine how much CRR has to be maintained. CRR is a big cost for the bank because these are cash deposits maintained with the RBI and banks earn nothing on it. The Feb policy announced that incremental loans given to residential housing, automobiles and to MSMEs will be eligible to be deducted for calculating NDTL. To that extent, the CRR requirements of the banks will reduce and becomes an incentive to lend to these sectors.
What are LTROs and what is their link to monetary transmission?
One of the challenges for the RBI is proper transmission of rates. That means when RBI cuts rates, it should result in lower loan costs for borrowers. The LTROs are long term repo operations where the government assures that it will do Rs100,000cr of repos each fortnight at the repo rate. This will give long term assurance of liquidity to banks and they will be able to pass on rate cuts more smoothly. That is the purpose of LTROs.