One big expectation ahead of the October 2021 policy was that the RBI may opt to hold repo rates but hike reverse repo rates from the current level of 3.35%. That was proposed by Jayant Varma in his dissent note to the accommodative policy stance. However, even as banks like Citi were hinting at a reverse repo rate hike, the Monetary Policy Committed (MPC) opted to hold on to status quo on all fronts.
A quick look back at the October 2021 policy
In a sense, the October policy was different in that inflation was well under control and growth green-shoots were back. At least, the early indications were that the GDP, IIP and core sector had finally outgrown the pre-COVID levels. In addition, the high frequency indicators like the PMI manufacturing, freight data, GST collections and e-way bills all indicated revival in growth. While RBI maintained status quo, there are ample indications that going ahead it would be inflation risks that would drive monetary policy.
Here is the gist of the MPC minutes of the October monetary policy meet.
- Economy recovery is still uneven: Dr Shashank Bhide
Supply side disruptions during the second wave were less stringent and more localised. This helped reduce the constraints on the supply side but the demand side weakness is yet to be overcome. This is reflected in the present uneven pattern of growth.
Bhide voted for holding rates and maintaining the monetary stance as accommodative. His concerns were more on the uneven growth patterns, wherein the recovery has been concentrated in the organized sector with the unorganized MSME sector still far away from a decisive recovery. Bhide suggested low rates and an accommodative policy at least till the time the indicates of a more stable and durable recovery were palpable.
- MSME pain is still not well documented: Dr Ashima Goyal
Demand is uncertain beyond pent-up demand and the festival season bias. As of now, slowdown in global growth and more Covid-19 surprises are possible, despite progress on vaccinations. Also, the data lags mean we are not aware of the extent of scarring in small and medium enterprises (SMEs), contact intensive services etc..
Ashima Goyal has two points; one on inflation and one on growth. Reacting to the fears of negative real rate of inflation, Goyal feels it is acceptable for a short period of time, if there are indications that growth will recover in the meantime. Her main justification for voting for 4% rates and an accommodative stance is that the pain on the MSME sector may still not be known due to lags in data flows, which makes a case for sustained accommodation.
- Be data driven, not assurance driven: Jayanth Varma
I am not in favour of the decision to keep reverse repo rate at 3.35%, and vote against the accommodative stance. Raising reverse repo to 4% will demonstrate MPC’s commitment to inflation targets. It will also help anchor expectations and allow lower long-term rates to be sustained till full-fledged economic recovery.
For the second MPC meet in succession, Jayanth Varma has objected to the idea of giving an assurance of continued accommodation. Varma feels that the risks of oil prices and the tail risks of Evergrande were being ignored. Varma feels that the current repo rate corresponds to negative real rates of -1.5%, which could impact capital flows into India.
- Beware the risk of premature tightening: Dr Mridul Saggar
We have broadly been right in averting premature tightening and allowing Indian economy to recover. With calibrated liquidity, negative real rates can be corrected at a later date. I, therefore, vote for keeping the stance unchanged and also policy rate unchanged in line with the resolution.
Saggar warns that the biggest risk at this stage would be premature tightening. At times, economic recovery can be a mirage and driven more by base effect factors. Saggar also feels that the latent risks in the macroeconomic scenario do not justify shifting to a more hawkish stance at this point of time. He has also pointed that crude may impact inflation by only 15-20 bps so the risk was manageable.
- Global risks are bigger than domestic risks today: Dr. Michael Patra
Even as domestic macro configurations are improving, risks from global developments are rising and warrant a close watch as they could stifle the recovery in India. Exports are at risk from logistics bottlenecks, shortages of containers and elevated freight rates. That makes global risk a potent factor.
Dr. Patra has underlined that policymakers for now should worry more about the global risk factors like spiking commodity prices, coal and power shortages, Evergrande implosion in China etc. Patra feels that an accommodative stance combined with low rates would help deal with such external risks more effectively at this juncture.
- RBI remains committed to low inflation and price stability: RBI Governor
The global economy is on a more difficult tangent of slowing growth momentum with entrenched inflation. Central banks globally face a trade-off between slowing growth and higher inflation and their actions have been in sync with domestic macroeconomic milieu. India will follow a similar approach.
While focusing on the need to maintain an independent monetary policy, Das has underlined the risk of rising inflation globally. Also, the RBI governor saying that price stability was their leit motif, means that inflation could prove a bigger driver of monetary policy in future months.
In conclusion, the big trigger will be how soon the US Fed starts the taper and embarks on rate hikes. At the end of the day, RBI is unlikely to risk monetary divergence with the US Fed for too long. At the core of this argument is inflation.
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