Minutes of Monetary Policy Committee (MPC) meetings are always of keen interest to monetary policy connoisseurs who are always eager to read between the lines. The minutes of the latest MPC meeting released last Friday are no exception. Unlike the relatively brief (brief?) statement issued at the conclusion of the meeting, the minutes of the meeting contain detailed statements from each of the six members of the MPC and are of additional interest when the members do not completely see eye to eye, As was the case in the last meeting at the end of September.
The meeting was notable for the lack of consensus on both rate action, where five of the six members voted to increase the repo rate by 50 basis points, while one – Ashima Goyal – voted for a small increase of 35 basis points and ‘stance’. ‘ Voted on. , again, one member, Prof. Jayant Verma, wanted to allow more time for the transmission of the previous hike before opting for the status quo (read, return of housing).
Minutes go a long way in shedding light on the causes. For example, Dr. Goyal’s preference for lower rate hikes is based on the premise that “when the backward effects of monetary policy are large, as is the case in India, over-reaction can be very costly. Harmful effects”. Many clear up late and they are difficult to reverse.” Furthermore, “high uncertainty also demands slow steps”. Both are valid points.
Verma’s initial priority was for a sharp increase of 60 basis points to take the terminal repo rate to six per cent. However, he defied the MPC’s majority view on the grounds that the difference of 10 basis points is “not material”. Further, “it may well be known that even more monetary tightening is required, but it makes sense to wait and see if the repo rate of around 6 per cent will bring inflation back on target.” enough. If we continue to tighten without a reality check, we will run the risk of overshooting the repo rate required to achieve price stability”. Well said!
While one cannot deviate from the wisdom of that old adage, “we need to cross the river by feeling the stones”, Varma’s argument on the ‘stance’ is hard to buy. They argue that “the MPC cannot be guided” by the impact of global monetary tightening on the interest rate differential” on the grounds that “the statutory mandate restricts the MPC to consider only two factors when setting interest rates”. is – inflation and growth (and) it was a conscious legislative choice to allow monetary policy. should be determined by domestic economic considerations and left to manage the external sector using other tools,” is too theoretical.
As Goel has argued, there can be many reasons for stopping or, indeed, slowing down when hardening, but to say that the MPC can ignore what is happening on the global scene is unrealistic. Michael Patra, as deputy governor in charge of monetary policy, has of late acknowledged that the reality is that “the dispersal is global and massive; however, the responsibility for achieving stability is national. Each country is in its own right”.
Unfortunately, the minutes do not add much to what we already know about Governor Shaktikanta Das’s views as these were reflected in both the statement issued at the conclusion of the meeting and the press conference that followed. But as the war in Ukraine continues and the US Fed is determined to give tough love to its handling of US inflation (September number 8.2%), their faith in the strength of the Indian economy is set to be tested.
One can only hope that Das got it right when he says, “Overall, I am optimistic about the future prospects of the Indian economy, its resilience and ability to meet current and emerging challenges.”
His call for “calibrated monetary policy action” and assurance that the RBI and MPC “do whatever is necessary and under our control to quell price pressures, lower inflation expectations and control second round effects”. It shows that we are in safe hands.
On a different note, the Minutes are silent as to whether there was any discussion about the contents of the letter to the government (under the law) in the event of a real possibility of inflation exceeding the upper level (since realized) consistently. End of target band of 2-6% for three quarters. Is this deliberate silence? A matter of minutes they hide more than they reveal?
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