The MPC minutes are significant as they reveal the thought processes that have gone in when the members have taken a decision on rates and stance. This is a progressive move in transparency as one gets to read about the arguments on both sides. Yet, ever since the MPC was constituted there has generally been a consensus and there has hardly been a case of the two sides of an argument being evenly matched—in which case, the Governor exercises his prerogative.
The minutes of the last MPC meeting are interesting as there is unanimity on the repo rate, but not on the stance. This was also the opinion earlier too, with one of the experts having a different view on the stance. However, the commentary from the dissenting expert is interesting.
Comments made by one of the independent members send mixed signals. The member starts by saying that the outlook on inflation and growth has changed only marginally since the last policy, which can be interpreted as a good sign. More significantly, it is stated that the two concerns which were highlighted by the member in the last policy are less important today—crude oil matrix and monsoon prospects.
For oil, it is argued that there are few chances of any spike in the price in the near term, based on the evolving dynamics of the market. In the case of monsoons, there is less concern on any adverse impact on the economy, even though the weather department has projected even chances. That’s so because it has been posited that the economy has shown to be resilient to the monsoon, which means that this will not affect growth or inflation.
Against this background, it has been logically concluded that the situation does not warrant a change in the repo rate, which was also the majority view. More specifically, it is argued that the present repo rate is good enough to ensure that inflation will be below the thresholds that the MPC has to protect and will also drive it towards the middle of the band. This gives the impression that all is under control. However, there is a caustic statement made subsequently that he is not comfortable with the ‘self-congratulatory tone’ in the MPC statement on inflation. Here, he again points to significant risks to both inflation and growth.
Hence, the member blows hot and cold over whether the economy is now comfortable with growth and inflation. This contrasts with the statement that the two major risks highlighted, relating to the oil prices and monsoon, are not really significant. Now, this can be interpreted as there still being risks to inflation, in which case there could be an argument for raising rates further. But doing so would also mean that it will come in the way of growth, something against which other members too have voiced their reservations. Therefore, there are mixed signals here on whether the worst of inflation is over or not.
Further, the MPC member seems to allude that ‘withdrawal of liquidity’ is unclear as a stance, saying “whatever that phrase may mean” with reference to it. This has been the view taken even in the past meetings and hence there may be reason for the MPC to explain the meaning in more definitive terms. Is it a case of surplus liquidity in the system that needs to be drawn out? Or is it a case of real interest rates being high or low or appropriate? At any rate, the view was that the stance was disconnected from reality and by maintaining the same, “it can inflict significant damage to the economy.” The reason presumably is that a real repo rate of 1.5% can come in the way of growth.
But it was seen in FY23 that the high interest rates did not quite stifle growth (which came in at 7.2%). In fact, growth in credit was quite high at 15%. Therefore the continuation of the stance of withdrawal of liquidity cannot really impede growth. A stance is not an action like a repo rate hike or cut, but a signal to the market on how the central bank, or rather, the MPC thinks the economy will behave, which includes both growth and inflation. At the ground level, the market looks at it as a prelude to a change in the position on repo rate.
RBI’s position, however, is quite unambiguous on the subject—inflation, though under control, has to be monitored as the El Niño in particular can create disruption. Liquidity is still in surplus and there is some time to go before inflation will come down to 4%. Therefore, a rate pause to gauge how the 250 bps rate hike has worked out is pragmatic. And given these considerations, the stance of withdrawal of liquidity seems to be consistent.
The dissenting voice is surely interesting and probably also required in all such decision-making. The contrary statements are, however, puzzling and an unequivocal stand on growth and inflation would have made things clearer.
The author is Chief economist, Bank of Baroda
Views are personal