MPC minutes says enough of growth focus

The general practice of the RBI is to announced the minutes of the MPC meet a full 14 days after the conclusion of the meeting. The MPC meet, which concluded on 08th June, announced its minutes on 22nd June. It may be recollected that in June, the RBI raised repo rates by 50 basis points from 4.40% to 4.90%. This was in addition to the hike of 40 bps to 4.40% in the special May 2022 meeting of the MPC. In May 2022, the RBI had also hiked CRR by 50 bps from 4.00% to 4.50%, to absorb liquidity to the tune of Rs.87,000 crore.

In the June meeting, the members were almost unanimous on all fronts. The six members have unanimously voted to hike the repo rates to 50 bps. In addition, they also unanimously voted for the gradual and calibrated withdrawal of the accommodation or the liquidity program. Here is what the six members of the MPC had to say about why they opted to hike rates and also withdraw the accommodative stance in a phased manner.

    1) Shashank Bhide focussed more on the dual impact of commodity prices. According to Bhide, commodity prices of crude oil, minerals, metals, coal and coking coal had spiked and resulted in thinner operating margins. On the other hand, it also created supply chain bottlenecks and prevented corporates from operating at full capacity. The crux of his argument was that the inflationary pressures had sharp accelerated since March 2022 leading to unprecedented tightening by the RBI. 

    2) Ashima Goyal underlined the risks of generalizing inflation. According to Goyal, the inflation in the US and the inflation in India were not exactly comparable. The consumer inflation in the US was much higher than India and India’s inflation was largely on account of its overt dependence on imported crude. However, in India, extending the free food program had blunted food inflation. Goyal also pointed that monetary tightening was a bigger worry for the US as their real rates were -6% compared to -2% in the case of India. 

    3) Jayant Varma called on the urgency to take the real rates into positive territory to avoid distortions in the financial markets. Jayant Varma, who has traditionally been a dissenter, was largely happy with the 90 bps rate hike in the last 2 policies. His argument is that since inflation will only taper in the medium term, the agenda in the short term must be to push repo rates higher. While agreeing with the consensus view, Varma called for front loading of rate hikes.

    4) Rajiv Ranjan of the RBI was also in favour of front loading of rate hikes. An interesting point made by Rajiv Ranjan was that the pace of transmission had considerably speeded up in India due to introduction of external benchmark-based lending rate (EBLR). This was more sensitive than the PLR. However, Ranjan warned that deflating an economy can be tricky and soft landing is tough in practice. Hence, he has also called to improve the quality of capex, apart from bring the rates higher. 
 

    5) Michael Patra of the RBI also focussed on the incremental or marginal inflation in India. According to Patra, 70% of the increase in consumer inflation in India was explained as the lag effect of the Ukraine war and the supply chain bottlenecks. The focus should be on using blunt monetary instruments like rate hikes till supply caught up. Patra has also highlighted, and rightly so, that the direction of inflation would matter more than the absolute inflation number.

    6) Last, but not the least, the RBI governor was not called on to vote, but his view matter a good deal considering his vantage point. Das has warned that despite best efforts, adverse spill-overs from global commodity prices would impact domestic inflation. Aggressive rate hikes were a monetary risk but it was worth taking considering the growth momentum. 

To sum it up, MPC does not want to use growth as an excuse for keeping rates low in future. The days of mollycoddling growth is over. Rates will rise further and it will be front loaded. That is the message from the MPC minutes.