December 2024 RBI MPC minutes shows a clear split on rate action

26 Dec 2024 , 10:12 AM

STATUS QUO IN DECEMBER POLICY; BUT OPINIONS SPLIT

The status quo on repo rates was already factored, but it was not an easy decision. Out of the 6 members of the MPC, 2 members (Nagesh Kumar and Ram Singh) were ok with the stance of the policy, but wanted the RBI to cut rates by 25 basis points. However, the majority view still was that the inflation was still too high to justify a rate cut. The two dissent votes focused largely on the faltering GDP growth, especially with the Q2FY25 GDP growth falling sharply to 5.4%. The RBI is still betting that last mile inflation could be sticky.

However, repo rates were just part of the story in the December monetary policy. The RBI cut the GDP estimates for FY25 by 60 bps from 7.2% to 6.6%, while it raised the inflation estimate for FY25 by 30 bps from 4.5% to 4.8%. Both were along expected lines. However, the more interesting aspect of the policy was the 50 bps cut in CRR (cash reserve ratio). The cut in CRR to 4.0% of NDTL, releases about ₹1.16 Trillion of liquidity. The permanent loss of global liquidity is closer to the range of ₹2.95 Trillion. To bridge this shortfall, RBI may cut CRR by another 50 to 75 bps. Here is what the MPC members had to say on the policy.

• NAGESH KUMAR CONCERNED ABOUT GROWTH SLACKENING

For the second policy in a row, Nagesh Kumar had a dissent vote and preferred a 25 bps rate cut to 6.25%. He is of the view that the progressive fall in GDP growth from 8.2% in FY24 to 6.7% in Q1FY25 and to 5.4% in Q2FY25 is a matter of grave concern. While services growth moderated by 60 bps and Agriculture output improved by 150 bps, the real area of concern was the fall in manufacturing GVA from 7.0% to 2.2%. According to Nagesh, growth was being hit by a double whammy of slowing consumption and slowing investments too.

• SAUGATA BHATTACHARYA SEES MERIT IN STATUS QUO ON RATES

Saugata Bhattacharya voted in favour of status quo on repo rates and on the stance of the policy. He cited recent studies which had underlined that the impact of sustained rate hikes was lot more pronounced in reducing inflation, than in impacting GDP growth. On the impact of higher interest rates on corporates, Bhattacharya underlined that the impact was much less on mid-caps and small caps. He also pointed out that the core inflation could be impacted by the rise in non-farm inputs. Status quo was legitimate in global uncertainty.

• PROF RAM SINGH JOINS THE DISSENTERS CLUB

Ram Singh of DSE was the second member of the MPC to vote against the status quo and preferred a 25 bps rate cut. According to Singh, if the impact of the rally in gold and silver were removed then headline inflation would be 3.8% and core inflation 2.8%. According to Ram Singh, the fall in GDP growth along with a fall in the core inflation is an indication that the gap between actual growth and potential growth was rising. He added that a monetary policy supportive of growth would also be in sync with the current global paradigm.

• RAJIV RANJAN UNDERLINES THAT MPC WAS IN ACTION MODE

According to Rajiv Ranjan, even though the MPC may not have cut repo rates, it had changed the stance to neutral in October and cut CRR by 50 bps in December. He also expressed confidence that the lower growth and higher inflation were both, aberrations, and would reverse soon. According to Rajiv Ranjan, policy choices were still tough and a status quo on rates would be the best choice at this juncture. He expressed confidence that once the food prices also moderate, there would be enough room to ease repo rates.

• MICHAEL PATRA SAYS, NEED DURABLE REDUCTION IN INFLATION

According to Patra, it is true that high inflation has hit purchasing power and that has, in turn, hit the manufacturing output. However, Patra highlighted that the RBI had been worried about the persistence of food inflation, instead of being cyclical. The RBI upping its inflation guidance and lowering growth guidance again presents the MPC with a policy dilemma. However, the RBI would wait for durable fall in inflation pressures, so that the impact of any rate cut on real GDP growth can be palpable. That is some time away.

• RBI GOVERNOR OPTIMISTIC ABOUT GROWTH RECOVERY

The RBI governor remains optimistic about a revival in growth in the third and fourth quarters. Agriculture growth triggers optimism with the level of reservoirs full ahead of the Rabi season. Das also pointed out that the spike in vegetables had a disproportionate impact on headline inflation. The priority for the RBI is to bring down inflation closer to the target. Lower inflation will automatically trigger higher disposable incomes and all its concomitant virtues. Das preferred status quo on repo rates.

THE US LIKELY TO TURN LESS DOVISH

On December 18, 2024, the US Fed not only announced the last policy of the year, but also put out the quarterly projections of key data points. The Fed has already guided that number of rate cuts in 2025 would be reduced from 4 to 2. In short the one-year rate cut guidance is now being stretched across two years. While growth has remained broadly robust, inflation has diverged farther from the target of 2%. The experience on the inflation-growth dichotomy is almost similar in India also. It is, probably, not yet time to be ultra-dovish in monetary policy.