Monetary Policy Committee Discussion

The minutes of the discussion of the Monetary Policy Committee (MPC) that concluded on 06th April were released on 20th April. Like the previous 3 MPC meetings in October, December and February, there was absolute consensus among the 6 members on the need to maintain status quo on rates. However, the MPC seems to be gradually seeing some members veering towards dovishness, while some members are veering more towards a hawkish rate stance. Here is what the members discussed at the MPC meet and here is what it means for the future trajectory of rates…

Observations of Dr. Chetan Ghate…

Dr. Ghate has focused largely on the upside risks to inflation. The previous meetings of the MPC have highlighted the upside risk to non-core inflation and the possibility of higher food inflation once the base-effect wears out. The trend in CPI inflation and food inflation over the last few months has evolved almost exactly as per the MPC estimates. Non-core inflation continues to be under pressure due to higher crude oil prices. Food inflation also comes into risk due to the negative impact of a likely El Nino effect as well as its impact on the Kharif crop sowing. According to Dr. Ghate, these upside risks to inflation raise serious doubts whether inflation will continue to remain in the range of 4% with a leeway of 2% either ways. Considering the higher risk to inflation, especially with the OPEC being intent on persisting with the quotas, Dr. Ghate has recommended maintaining status quo and keeping the repo rates at 6.25%.

Observations of Dr. Pami Dua…

Dr. Dua has focused on the growth effect of remonetization. With nearly 75% of the demonetized currency supply restored, the risks to growth due to a liquidity crunch are minimal. Also in the aftermath of demonetization, banks are flush with funds and have already cut the MCLR by up to 100 basis points. As a result the spur to growth has already happened indirectly, if not directly. Hence rate cuts as a means to spur growth may not hold much water. Secondly, Dr. Dua has also expressed apprehensions that the higher discretionary spending post the higher HRA payouts to government employees may be instrumental in spurring inflation. GST, which is likely to be implemented from July 01st 2017 onwards, also has the potential to spur inflation in the first few years. Considering these factors, Dr. Dua has also favoured maintaining the status quo and holding on to repo rates at 6.25%.

Observations of Dr. Ravindra Dholakia…

The first signs of a variance in opinions are evident when one reads the viewpoint of Dr. Dholakia. While some of the key members have refrained from adopting an overly dovish or hawkish position, Dr. Dholakia has largely been in favour of a more dovish approach to monetary policy. Dr. Dholakia is of the view that oil prices are unlikely to sustain at higher levels and the Seventh Pay Commission payouts are unlikely to be inflationary. Dr. Dholakia is also of the view that the El Nino, even if it happens, may not impact food prices due to the comfortable buffer stock position available. While Dr. Dholakia does not see inflation as a major risk in the near future, he is of the view that cutting rates may not be required practically considering that the financial system is still flush with liquidity in the aftermath of demonetization. Thus Dr. Dholakia’s justification for maintaining status quo on rates is driven more by liquidity rather than by inflation fears. Considering that Dr. Dholakia was the most dovish among the MPC members, the evolving opinion in the next few meetings may be interesting.

Observations of Dr. Michael Patra…

In a position that is in exact contrast to that of Dr. Dholakia, it is clear that Dr. Patra sees clear upside risks to inflation due to poor monsoons, higher oil prices and the impact of HRA on the 7th Pay Commission payouts. In fact, Dr. Patra had originally mooted the idea of shifting the monetary stance from “Accommodative to Neutral”, which was broadly accepted by the MPC. The next few meetings may highlight the road ahead. In fact, while suggesting status quo on repo rates, Dr. Patra has also eulogized the merits of being more hawkish and raising rates if required considering that the Fed is likely to adopt a combination of aggressive rate hikes and bond tapering.

Observations of Dr. Viral Acharya….

Dr. Viral Acharya has expressed concern over the mean-reversion in the price of vegetables. Over the last few months, food inflation has been low due to vegetables and pulses, which were sold off in many markets at distress prices. That distorted the picture of inflation on food items. Dr. Acharya expects the mean reversion in food prices to happen sooner rather than later. Dr. Acharya has highlighted a very important point about the strength of the rupee. The strong INR has kept landed cost of oil in check but that stance could change if it really starts hitting the exporters. Dr. Acharya has underlined the need to focus more on the balance sheet of banks and reduce their stress as that will be more critical than looking at a rate cut. Dr. Acharya also favoured a status quo on repo rates at 6.25%.

Final observations of Dr. Urjit Patel…

With total consensus for the fourth consecutive MPC meet, the RBI governor was really not required to vote on the decision. While accepting the inflation argument, Dr. Patel has also highlighted that the impact of demonetization has been minimal and ephemeral. As a result, the need to spur growth by cutting rates is not relevant any longer. Dr. Patel also feels that the banks still have room to cut rates further considering that the surfeit of liquidity in the system is simply unwilling to go. Dr. Patel has not been in favour of keeping status quo on rates, but has also suggested continuing with the neutral stance in place of an accommodative monetary stance.

The bias of the MPC clearly seems to be in favour of a status quo on rates. However, the first separation of views is visible in these minutes between an extreme hawkish stance and a moderately dovish stance. That may provide fodder for future MPC discussions in the months ahead.