The February RBI MPC meeting saw the divide between the members of the committee getting more prominent, as seen in the 4-2 split decision on the 25 bps rate hike announced earlier this month and the continued ‘withdrawal of accommodation’ stance. The disparity in views came as the members debated the trade-off between growth and inflation, with the dovish members voting for a pause and hawkish members voting for the hike. As the members seemed to solidify their stances further, experts sought to predict how their perspectives would affect future monetary policy decisions.
The divergent views on the future trajectory of rate hikes, growth and sticky core inflation revealed that the three internal committee members including Governor Shaktikanta Das were significantly hawkish; external member Shashanka Bhide seemed ‘cautiously neutral’; while external members Jayanth R Varma and Ashima Goyal sounded dovish, said Madhavi Arora, Lead – Economist, Emkay Global Financial Services.
MPC on growth prospects
The dovish members of the committee emphasised that further repo rate hikes might adversely affect growth. “Raising real policy rates to reduce demand has a stronger effect on growth than it does on inflation,” said Ashima Goyal. To this, Governor Das said sustained domestic demand is already driving growth. He added that “the enhanced thrust on capital spending and infrastructure in the Union Budget 2023-24 should bolster manufacturing and investment activity”. Rajiv Ranjan noted that domestic demand, in accordance with other factors, including high frequency indicators, convinced him of the inherent strength in the Indian economy. Therefore, an “untimely pause” would be a “costly policy error”.
MPC on inflation
Even though headline inflation saw some moderation, internal MPC members raised an alarm regarding the sticky core inflation. However, Rajiv Ranjan and Michael Patra said that the moderation in headline inflation was a result of seasonality of vegetables, while inflation pressures otherwise have broadened, adding that the easing of inflation has been intermittent. With an uncertain global outlook, decisive action to moderate inflationary pressures is required, stated the hawkish members. The internal members reiterated the need for a monetary policy stance that will focus on reducing inflation to its target.
Further rate hikes on the cards?
Accounting for international instability and changes, Jyoti Prakash Gadia, MD at Resurgent India, said, “Considering the current stance of the US Fed and persistent global uncertainties, it is felt that a gradual approach may be advisable instead of taking a hasty pause on taming inflation. The divergent opinions of the members however indicate a platform for healthy debate and deliberations to arrive at a solution that best suits the economy in the current scenario.” Additionally, experts from Emkay Global, as well as Kotak Securities, predicted a hike of 25 bps in the April meeting.