Ahead of the RBI monetary policy on 08th April 2022, there was already a consensus that it would be status quo on rates and accommodative stance. The Russia Ukraine war not only made most commodities dearer, but also created supply chain bottlenecks due to the Black Sea embargo. Stringent sanctions imposed on Russia by the US may worsen the economic crisis. IMF has cut world global forecast by 80 bps from 4.40% to 3.60%. IMF has also cut India’s forecast for full year growth by 80 bps from 9% to 8.2%. Growth stress is for real.
In the last two meetings, the only member to give dissenting vote on continued accommodation was Dr. Jayanth Varma. In the April policy, even Dr. Varma appeared to have changed his stance. Varma not only voted for status quo on rates but also voted in favour of continued accommodative stance till signals of growth were visible. The MPC minutes published by the RBI on 22nd April, gives deeper insights into the thought process of the 6 members.
1. Shashank Bhide talks of emergencies created by the war
Shashank Bhide underlined that between Feb-22 MPC meet and the Apr-22 MPC, the big difference was the intensifying Russia Ukraine war. The war had severely stressed global supply chains leading to runaway inflation in a host of commodities. That is evident in the Mar-22 WPI inflation at 14.55%. March had just seen the first round of impact of the war on growth and Bhide feels there could be more pain in store.
According to Bhide, the RBI cannot and will not lose sight of the inflation levels. However, it will continue to be a trade-off between inflation control and growth. He also added that for now, the bias would continue to be towards ensuring that the growth engine was not disturbed. Bhide voted for status quo with a time table for accommodation withdrawal.
2. Ashima Goyal highlights the secondary consumption risk
Goyal underlined that the immediate outcome of the spike in commodity prices, especially petrol and diesel, was that households cut consumption. Apart from the prices of goods and services, there is also the negative wage effect that is starting to show. Goyal underlined the need to check consumption constriction beyond a point, due to its repercussions for growth.
Goyal highlighted that liquidity absorption has been happening on a consistent basis. However, low rates are critical to boost consumption; especially purchases like homes, cars, consumer durables etc. According to Goyal, notwithstanding the inflation risk, the focus of monetary policy at this juncture must be to neutralize global shocks. Ashima Goyal also voted for holding repo rates at 4% and keep monetary stance accommodative.
3. Jayant Varma no longer striking a dissenting note
Unlike in the last few MPC meetings, Jayanth Varma did not vote against continuation of the accommodative stance. However Varma made an important point. He feels the stress on inflation as an outcome of the war is visible, but impact on growth is not immediately visible as it tends to be back-ended. This is the premise on which Varma has framed his vote shift.
However, Varma appreciated the fact that there has been an effort to normalize the policy corridor. According to Varma, the MPC agreeing to prepare for the withdrawal of accommodation at a future date, by itself, is an important signal to the market that the RBI will be aggressive in inflation control. That will surely tone down inflation expectations.
4. Mridul Saggar believes growth weakness will soften inflation
That is a broad point on which most MPC members agree on. For instance, the very idea of China slowing down due to COVID resurgence, led to oil prices tapering. Saggar believes that demand constriction due to the war, may do the job that interest rate hikes were supposed to do. They are likely to temper growth, consumption and inflation.
Mridul Saggar concurs with Varma on the fact that given the trade-off between growth and inflation, it is better to allow the liquidity corridor to work first. This can be followed by rate action. Saggar has also highlighted that an important data point would be how hawkish the US Fed actually remains on rates and bond unwinding. When it comes to actual monetary management, there is normally a gap between precept and action.
5. Dr. Michael Patra terms it the globalization of inflation
Patra has drawn an interesting analogy. In a world, that is becoming increasingly inward looking, inflation is the one thing that is truly globalized. With 60% of the developed world facing more than 5% inflation, the situation is as bad as the early 1980s. That was the time when Paul Volcker had launched his famous effort to slay the Inflation Dragon.
Patra feels inflation has reached a point where it is becoming anti-growth, creating a policy dilemma. Patra also feels that going ahead, liquidity draining would be good enough to handle spikes in inflation. With nearly Rs.5.32 trillion of COVID-induced liquidity already withdrawn, Patra believes the RBI can even afford monetary divergence for some time.
6. RBI Governor reiterates it is best to avoid disruptions
The RBI governor, Dr. Shaktikanta Das, did not have to cast a deciding vote since the consensus was already crystal clear on rates and accommodation. RBI also made an attempt to tweak the growth and inflation projections to more realistic levels in the Apr-22 policy. Unlike the US Fed which has given guidance of rate hikes over the next one year, the RBI governor has said that the MPC would refrain from giving any hawkish guidance. However, Das has underlined that any monetary policy action by the RBI would be gradual, well deliberated and sensitive to the growth impulses of the Indian economy.
There are 3 inferences that we can draw from the minutes of the MPC meet. Firstly, there is a unanimous view that much of the risks in the last 2 months were caused by the supply chain bottlenecks created by the war. Secondly, there is a degree of confidence that the negative impulses due to the war would automatically temper consumption and inflation. Lastly, at a philosophical level, the RBI will remain primarily committed to catalysing growth, even at the risk of monetary divergence. The Jun-22 policy may be a lot more conclusive.