MPC minutes show members less sure about being hawkish

23 Jun 2023 , 10:02 AM

The Monetary Policy announced by the MPC on 08^th June 2023 was largely along expected lines. Like in the April policy, the RBI MPC decided to hold rates even in the June policy. Effectively, the RBI has not hiked rates after February, when it had raised the Repo Rates to a level of 6.50%. In fact, between May 2022 and February 2023 the RBI had raised the repo rates by 250 basis points from 4.00% to 6.50%. On the subject of holding rates, the decision was unanimous with all the six members voting for keeping repo rates at 6.50%. However, on the monetary stance of withdrawal of accommodation, only 5 members agreed while Jayanth Varma felt that the monetary stance was not in sync with the economic reality.

There are several reasons why the RBI opted to hold rates in June also. The inflation has not come down to the level of 4.25%. That is just 25 bps away from the RBI target of 4%, so the central banks can afford to wait and watch for longer. Secondly, the RBI is of the view that the impact of rate hikes would only gradually show its impact on inflation. During that period, it was essential not to overdo monetary tightening. Finally, there was pressure mounting from the industry bodies about the impact of rising bond yields on the cost of borrowing of Indian corporates. The impact was visible in the falling net margin ratios and the worsening solvency ratios of Indian companies. That prodded the RBI MPC to hold rates at 6.50%, which effect held the SDF rate at 6.25% and the MSF and bank rate at 6.75%. Here is a gist of the views of the RBI MPC members. On the face of it, there is a consensus, the dichotomies of opinions on the future of hawkishness are quite visible in the minutes.

1. Shashank Bhide focuses on the inflation plus growth story

“The decline in the overall headline inflation in the recent two months combined with the strong growth performance in Q4-FY23 suggest a trajectory of lower yoy inflation of 5% and GDP growth of above 6% in FY24.”

According to Bhide, the Indian economy had finally entered a sweet spot wherein inflation has fallen sharply and the growth has held up, largely thanks to the services sector. Most of the services companies had been hit by COVID protocols and that was rebounding with a lot of revenge spending. Hence, Bhide was of the view that the RBI could afford to go slow on further rate hikes and it had the luxury of being predominantly data flow driven.

However, Bhide has also cautioned on the downside risks to this sweet spot. For instance, inflation at a global level still remains an X-factor. The delayed monsoons are also likely to have an impact on food inflation if the sowing season is impacted. On the growth front, the services exports are already facing pressure due to an expected global slowdown, while manufacturing looks flattering due to the very low base. These could change rapidly.

1. Ashima Goyal focuses on the narrowing input/output price gap

“The input output price gap of Indian companies is almost closed, profit margins have risen sharply in Q4FY23, input costs have fallen and wage pressures are absent. With slack demand, price hikes are unlikely. WPI inflation is in negative territory.”

According to Goyal, the front ending of rates was the big advantage that the RBI had. It had raised the rates in quick succession resulting in real rates at almost equilibrium levels. This will ensure that there are not risk of risk-off flow arbitrage for global bond investors and that gives the RBI the luxury to wait and watch for one more policy before taking a final call on the future course of action.

The real positive, according to Goyal, is the narrowing input / output price gap, which was reflected in Q4FY23 in terms of record gross profit margins for Indian companies. That is likely to sustain growth with Fitch already upgrading India’s FY24 GDP growth rate by 30 bps to 6.30%. Goyal voted for a pause. However, while voting for the withdrawal stance, she underlined that she was supporting the stance only because future trajectory is unclear.

1. Jayant Varma says monetary stance disconnected with reality

“The current repo rates are high enough to keep inflation below the upper tolerance band on a sustained basis and glide it towards the middle of the band. However, there are significant risks to both inflation and growth, and the process of bringing inflation under control is still very much work in progress.”

Jayanth Varma voted for the resolution to hold repo rates at 6.50% but dissented on the monetary stance of withdrawal of accommodation. Varma has expressed the apprehension that a withdrawal of accommodation as a stance would be feasible only when the RBI had curbed inflation. That was not the case and a stance of withdrawal of accommodation because of surplus liquidity in the system was out of sync with reality.

According to Varma, the real repo rate was already at 1.50% and that was good enough to create any disruptive outflows of capital and to curb inflation. He underlined that erratic monsoons and the crude prices remained two of the biggest threats to inflation. While both seem to be under control now, things could change at very short notice.

1. Rajiv Ranjan feels that knowing when to stop is a tough call

“The latest prints of growth and inflation indicate a Goldilocks scenario, with growth higher and inflation marginally lower than anticipated. In short, the cumulative actions taken so far are working in the right direction. However, knowing when to stop is hard.”

Rajiv Ranjan has spoken at length about the Goldilocks scenario wherein inflation has been coming in lower than expected and growth better than expected. The gist of his perception is best captured in the last point where he says that it is hard to decide when to stop. Even the US Fed has been struggling in the last part. While, the RBI was close to the terminal rate, it was tough to pinpoint, where and when that point would be reached.

Ranjan also pointed out that the pause in April had a sobering impact on cost of funds, albeit marginal. However, the pause was only meant to be a signal for the market and that signa was well interpreted by the market. Bond yields fell sharply and the average yield on loans also fell. Ranjan voted for status quo in rates and on the monetary stance.

1. Michael Patra suggests making the best of the elbow room

“The near-term outlook for inflation is benign, but there could be pressure points emanating from specific supply-demand mismatches in the second half of 2023-24. Monetary policy must ensure that such shocks dissipate without leaving scars on the economy.”

Patra, probably, put the stance of the RBI in the clearest possible manner. The RBI has been buying time and the combination of low inflation and robust growth had given the RBI the elbow room to experiment with a pause. He underlined that the RBI was not trying to give out any signal for interpretation, but was just making the best of the leeway offered. Patra also voted to hold rates and to keep stance as withdrawal of accommodation.

1. RBI Governor optimistic yet cautious

“The pause in April MPC was based on the need to assess the cumulative impact of 250 bps rate hike over the past one year. Our surveys indicate that anchoring of expectations is underway and our monetary policy actions are yielding the desired results.”

The RBI governor has made two important points. Firstly, he has underlined that going ahead the fight against inflation would be forward looking. Anticipating inflation is going to be a lot tougher. However, he abstained from any guidance. Secondly, Das also underlined that the RBI would look to sustain inflation around 4% on a durable basis.

The gist of the MPC minutes is that, like April, even June was a pause and not an affirmative decision. Like the Fed, the RBI is also positive that the cumulative impact of all the past actions would manifest gradually in the months to come. RBI may not have won the battle against inflation, but they sure look good enough to win it.