In the recent meeting of the Monetary Policy Committee (MPC) concluded on 08th June, the RBI raised repo rates by another 50 basis points from 4.40% to 4.90%. It must be noted here that in May 2022, the RBI had an unscheduled MPC meet where the rates were hiked by 40 bps to 4.40%. At that point, The RBI had also hiked the CRR by 50 bps from 4.00% to 4.50%, soaking up liquidity of Rs87,000 crore in the process.
If May 2022 marked a total shift of the monetary stance, June has underlined that trend. One of the most important documents is the minutes of the Monetary Policy Committee meeting, which highlights the arguments and perceptions of the six members of the MPC. The minutes of the June policy were published by the RBI on the evening of 22nd June. Needless to say, the vote for the 50 bps rate hike and the vote on the monetary stance was unanimous. Here is a gist of the discussion of MPC members during June 2022 policy meet.
Shashank Bhide refers to the dual commodity effect
Shashank Bhide has spoken at length about the dual impact of commodity prices. On the one hand, steep commodity prices of items like crude oil, minerals, metals, coal, coking coal etc resulted in supply chain bottlenecks. Hence factories were not able to function at full capacity constraining supply. On the other hand, this was causing rampant supply side inflation and hitting the most vulnerable sections.
Bhide pointed out that GDP growth projection of 7.2% for FY23 was still the best among the large economies in the world. However, the RBI had also simultaneously hiked the inflation expectations for FY23 to 6.7%. Inflationary pressures had sharp accelerated since March, forcing unprecedented tightening by the RBI. Shashank Bhide voted for a 50 bps hike in repo rates to 4.90%. He also voted for gradual withdrawal of accommodation to contain inflation without forsaking economic growth.
Ashima Goyal highlightswhy Indian inflation is different
Goyal started off highlighting the risks of generalizing inflation. According to Ashima Goyal, the scenario of India having higher inflation than the US had shifted and the US was facing consistently higher consumer inflation. Unlike the US, Goyal pointed out that Indian inflation was more vulnerable to crude prices and the uncertainty created by Ukraine war. She also pointed that the extension of the free food program, had largely blunted food inflation.
Goyal also pointed out that the wage rise in India has not been as rampant as in the US. During the COVID and post-COVID periods, the average real interest rate in India was -2% while in the US it was -6%. The point she has highlighted is that Indian monetary policy cannot be a mirror of the US monetary policy, notwithstanding the risks of monetary divergence. Goyal supported 50 bps rate hike and gradual withdrawal of accommodation.
Jayant Varma wants real policy rates in positive zone
By default, real rates of interest (net of inflation) must be positive. Jayant Varma is largely satisfied with the 90 bps rate hike in the last 2 policies, although he would have preferred over 100 bps. Varma has pointed to the urgent need to take real rates of interest into positive territory. Obviously, since inflation will taper in the medium term, the short term agenda must be to rapidly raise repo rates.
Varma appreciated that the June 2022 policy, unlike the May 2022 policy, does not talk about continuing accommodation. In the May minutes, Varma had pointed that continued accommodation in the current context was out of sync with the market reality. Hence, the decision to shift to withdrawal of accommodation in June policy has been highly appreciated by Varma. He voted for 50 bps rate hike and calibrated withdrawal of accommodation.
Rajiv Ranjancalls for front loaded policy action
Rajiv Ranjan has called for front loading of the rate hikes, which means, the rate hikes must be quicker and sharper. The repo rates in India are still indicating a negative real rate of -2% and according to Rajiv Ranjan, the quicker this comes into positive, the better. Ranjan also pointed out that the pace of transmission had considerably speeded up in India after the introduction of external benchmark-based lending rate (EBLR).
However, Dr Ranjan has warned that a policy of disinflation has never been easy and is also fraught with risks. Hence closer coordination of fiscal and monetary policy was a must. He called for prioritizing price stability and improving the quality of fiscal capex. Ranjan also voted for 50 bps rate hike and gradual withdrawal of accommodation, while encouraging counter-cyclical fiscal policy.
Michael Patra warns of the impact of geopolitical risk
Patra has pointed that nearly 70% of the increase in consumer inflation in India can be explained as the lag effect of the Ukraine war and the supply chain bottlenecks. However, to buy time for supply to respond to demand, the RBI has been forced to use blunt monetary instruments. Empirically, inflation above 6% has had negative repercussions for growth.
Patra has made an important point that in the coming months the direction of inflation would matter more than the level of inflation. That is because headline inflation will remain elevated across the world. Patra also joined the vote to ensure that tighter repo rates would squeeze the froth out of inflation and bring it first into the tolerance band of under 6%.
RBI Governor calls for dynamic monetary approach
The RBI governor, Shaktikanta Das,did not have to cast a deciding vote amidst the unanimity among members. Das pointed out that adverse spill-overs from global commodity prices would continue to impact domestic inflation. With growth momentum on auto mode, Das feels it is the appropriate time to take a monetary risk and go aggressive on rate cuts. After all, curtailing inflation is the real challenge for now. More importantly, Das also supported the stance of shifting the policy focus to withdrawal of accommodation.
Here are some quick takeaways.It is official that the RBI would not use growth as an excuse for keeping rates low in future. Pampering growth is well and truly over. Secondly, all members of the MPC have emphasized on the need to front-load rate hikes to bring the real repo rate to positive territory. Lastly, the MPC has dwelt at length on a more coordinated action plan with fiscal policy in sync with monetary policy to amplify the macro effects.