Informist, Friday, Jun 21, 2024
By Aaryan Khanna
NEW DELHI – The minutes of the Monetary Policy Committee's meeting held earlier this month show a commonality between the six-member panel despite divergent votes. All the members of the Reserve Bank of India's rate-setting panel agreed that monetary policy should continue to be disinflationary, but two were convinced it would continue to be so after a 25-basis-point repo rate cut.
On Jun 7, the MPC voted with 4-2 majority to keep the policy repo rate unchanged at 6.50%. It also decided to maintain the "withdrawal of accommodation" stance to ensure inflation progressively aligns with its target, while supporting growth. This was the eighth straight policy with a status quo on rates and stance.
Ashima Goyal, who joined fellow external member Jayanth Varma in voting for a rate cut, made a vociferous case to match her vote. She said that supply shocks are no longer having a persistent effect on inflation or inflation expectations. Instead, a rate cut and appropriate messaging beyond that would ensure that headline CPI inflation returns to the RBI's aim of 4%.
"We have waited for one year to watch the impact of these (supply) shocks, now it is time to move on," Goyal said in her minutes, who also voted on softening the policy stance to neutral. "Even with these changes, monetary policy would remain disinflationary towards bringing inflation credibly to the target."
However, high food inflation and the caution over further shocks pushing up retail prices kept four members of the panel in favour of a status quo on the policy front. RBI Governor Shaktikanta Das reiterated many aspects of his post-policy statement and press conference, including the fact that food inflation was behind the "grudgingly slow" decline in headline inflation.
In May, CPI inflation fell to 4.75% in May, the lowest in a year, from 4.83% in April. Of this, the food and beverages index rose 7.9% on year. While the headline figure has been within the RBI's tolerance band of 2-6% for nine months, it has been above the 4% target for nearly five straight years.
"Let me emphasise, the inertia of inaction should not drive us to action," RBI Executive Director Rajiv Ranjan said in his minutes. He noted the risk of a spillover of food price shocks to the broader basket, and instead said monetary policy must remain resolute to ensure price pressures dissipate. "Any consideration on policy change has to factor in this aspect to avoid backpedalling in future," Ranjan said.
RBI Deputy Governor Michael Patra said in his minutes that food prices held back even a consideration of a softening in the policy stance, calling the economy "hostage" to intersecting food price shocks. The speed of inflation easing, he said, was "disappointing" so far.
GROWTH POTENTIAL, REAL RATES
A clear case of divergence was the outlook on growth. The four members voting for a status quo said that the strong economic momentum in the economy is likely to sustain, and the growth outlook was upbeat. Patra pointed to an increase in fixed assets in companies' balance sheets, along with a rise in rural spending that could drive private investment further. Potential output was in broad balance in relation to its potential, the RBI deputy governor said.
"The calibrated tightening by 250 basis points between May 2022 to February 2023 has achieved disinflation with minimal output sacrifice as growth remains strong," RBI Governor Das said. He called CPI inflation "well above the 4.0% target" and said resilient growth allows monetary policy to remain "unambiguously" focused on curbing it.
Only one external member agreed with the RBI's take. Shashanka Bhide had also voted for a status quo on both rates and stance, and in his minutes pointed to the many uncertainties on the monsoon, geopolitics, and input price pressures. In such a situation, he favoured allowing both growth and inflation to move as they have without touching monetary policy.
"As the aggregate output projections for 2024-25 (Apr-Mar) reflect strong GDP growth, keeping the monetary policy focus on achieving the inflation target on a durable basis is appropriate at this juncture," Bhide said. The RBI projects India's GDP to grow 7.2% in the current financial year, revising upward its forecast by 20 bps from the previous policy. Fitch Ratings recently concurred with the RBI's forecast, while the World Bank projected India's growth at 6.6% in a report earlier this month.
All the figures show a slowdown from the 8.2% GDP growth in the provisional estimates for 2023-24 (Apr-Mar). Both Varma and Goyal argued that the current repo rate of 6.50% was high and hurting India's potential growth. Goyal said sustained readings with headline inflation nearing the target and core inflation – at 3.1% in May – below the aim showed that India's growth outlook was below potential.
Varma's statement was characteristically brief, and accounted for only two paragraphs. He called the real policy rate of 2% – the repo rate net of the projected CPI inflation of 4.5% in 2024-25 – well above the level needed for price rise to drop to 4%. To him, the potential growth rate was around 8% and a growth sacrifice of more than 1 percentage point was unacceptable.
"In my statement for the last meeting (April), I expressed concern about the growth sacrifice in 2024-25 induced by restrictive monetary policy," Varma said. "It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well."
Ultimately, the four votes prevailed. Ranjan, the RBI executive director in the monetary policy department, said the economy was in a "transition phase". He reiterated the central bank's mantra that price stability would aid long-term growth, and said even fiscal consolidation may be growth supportive if it leads to a ratings upgrade. S&P Global Ratings had in May upgraded India's sovereign credit rating to a positive outlook, indicating it may raise the current 'BBB-' rating within two years.
"With output in broad balance in relation to its potential, monetary policy can remain neutral to growth at this juncture and stay focused on aligning inflation to the target," Patra said. "That objective remains incomplete, which can undermine medium-term growth prospects." End
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