Key takeaways from the minutes of the August MPC meet…

The minutes of the Monetary Policy Committee (MPC) held on August 01st and 02nd were published by the RBI on 16th of August. The MPC minutes essentially captures the gist of the discussions of the 6 members of the MPC and also their justification for the rate action recommended. Interestingly, there was a lot more divergence in views this time around. While Michael Patra called for maintaining status quo on rates, Dr. Ravindra Dholakia recommended an aggressive 50 basis points cut in the repo rate. The remaining four members voted in favour of a 25 basis points cut in the repo rate, which is what eventually went through based on votes cast…

Perspective of Dr. Chetan Ghate…

Dr. Ghate dwelt at length on the sharp fall in CPI inflation with special focus on food inflation. The focus of Dr. Ghate was on the observation that inflation trajectory was hinting at a new normal which was much lower than the RBI stipulated rate of 4%. Dr. Ghate was of the view that with the 2017 monsoons also expected to be normal, the risk of food shortages was virtually ruled out. However, Dr. Ghate ruled out any aggressive rate cuts as he believed that a lot of the low inflation appeared to be an outcome of weak growth in IIP and in the core sector. Therefore, any pickup in growth could have a direct and immediate impact on inflation. Dr. Ghate voted in favour of a 25 basis points cut in the repo rates.

Perspective of Dr. Pami Dua…

While focusing on the low inflation potential of the Indian economy, Dr. Dua had a larger point on the future growth in domestic output and in exports. In fact, according to the Economic Cycle Research Institute (ECRI), which is based in New York, the India Leading Index is showing a clear sign of slowing down. This overhang is also visible on exports, which is apparent from the virtually tepid export growth that India has been seeing month after month. According to Dr. Dua, the entire Emerging Market (EM) space has to contend with lower inflation and India is unlikely to be an exception. As a result, the combination of low inflation and weak growth made a case for a cut in repo rates. Dr. Dua also voted in favour of cutting rates by 25 basis points.

Perspective of Dr. Ravindra Dholakia…

Dr. Dholakia, in the previous MPC, had been the long dissenting voice calling for a rate cut. However, with 5 of the other members voting in favour of status quo, the MPC held rates in its June MPC meet. In the August MPC, Dr. Dholakia and actually turned more aggressive in India adopting a more dovish approach to rates. Interestingly, Dr. Dholakia had asked for a 50 bps rate cut in June and his analysis had been largely vindicated by the inflation and growth data that have come out since. According to empirical estimates evaluated by Dr. Dholakia, the CPI will tend to gravitate towards the core inflation number rather than the other way round. With fuel prices likely to remain low globally, the low inflation syndrome could continue in India for much longer. In fact Dr. Dholakia has also suggested moving the management of repo rates from a policy based approach to a rule based approach. Dr. Dholakia voted to cut rates by 50 bps.

Perspective of Dr. Michael Patra…

Dr. Patra was of the view that low inflation was more an outcome of weak international growth and commodity prices and was vulnerable to shocks. Dr. Patra is also of the view that it was too early to be sanguine about the inflationary impact of GST. Dr. Patra was the sole dissenting voice within the MPC and he voted strongly in favour of maintaining the status quo on the rates front. It may be recollected that the idea of shifting the monetary stance from “Accommodative” to “Neutral” was propounded by Dr. Patra in the April MPC.

Perspective of Dr. Viral Acharya…

Dr. Viral Acharya of the RBI is looking at inflation from two directions. He is surely surprised by the persistently low inflation which has taken most economists by surprise. At the same time, Dr. Acharya is also confident that some of the key contributors to low inflation like vegetables, pulses, cereals and fuel could switch around at short notice. Even as Dr. Acharya voted for a 25 basis points cut, he opted to keep the monetary stance at Neutral level. He felt it was too early to turn accommodative as farm loan waivers could induce fiscal indiscipline which could actually be inflationary. Dr. Acharya is also of the view that an accommodative stance would fit in where there was a potential to push growth through aggressive rate hikes. Hence the better option would be to just engage in an indicative 25 bps rate cut.

Perspective of Rs. Urjit Patel…

Like many of the panel members, Dr. Patel has also expressed doubts about the sustainability of low inflation. Dr. Patel is of the view that some of the components of inflation could see a bounce and the proposed HRA payout could also be inflationary. However, since Dr. Patel also sees downside risks to the projected GVA growth of 7.3%, Dr. Patel has also voted in favour of a 25 basis points cut in rates.

The gist of the MPC minutes appears to be that India may be trending towards a lower inflation trajectory. However, there are concerns over liquidity driven inflation as well as weak growth. Additionally, there are also the global factors that need to be considered. A clearer perspective may emerge in the next couple of policies!