RBI MPC minutes hint at subtle shift from inflation to growth

The minutes of the Monetary Policy Committee Meeting announced on Friday, betrayed a very subtle shift in the thinking of the members of the MPC. The MPC is still hawkish and has raised rates by 190 basis points since May. The last 3 rate hikes have been of 50 bps each and this is one of the sharpest and most aggressive rate hikes that India has seen. However, now there seems to be a subtle thinking building up that going hawkish for much longer may impact the growth engine beyond immediate repair. At least two of the members; Ashima Goyal and Jayanth Varma, have called for being more balanced.

Their perspectives are not misplaced. Consider the statistics. Since May 2022, when the RBI started hiking rates, the repo rates have gone up by 190 bps from 4% to 5.90%. It is likely to go up by another 50 bps in December, which will take the rates well above the neutral rates, the point at which rate hikes start to hit growth. Since May 2022 when rate hikes started, the IIP has dipped -0.83% in August 2022 while the CP inflation has remained elevated at 7.41% in September 2022, even 4 months after the rate hikes started. The only redeeming feature is that the WPI inflation is down by 593 bps to 10.7%, but that is not saying much.

One rather nasty outcome of this entire rate increase story has been that the rupee has gone for a toss. The argument was that if the US hikes rates and India does note hike rates in tandem, then it would lead to monetary divergence. That means capital would flow out of India and rupee would weaken. Now RBI has hiked rates almost in sync with the Fed. Yet, more than $30 billion of FPI outflows happened in the last 1 year and the rupee has weakened from 76/$ to 82.50/$. Clearly, the rupee does not have the exorbitant privilege of being the globally preferred currency like the US dollar, which is where INR is losing out.

Ashima Goyal and Jayanth Varma call for going slow on inflation fight

In fact, Ashima Goyal called the global fight against inflation an overreaction on two counts. First, there was an overstimulation post COVID and then there was a hawkish overreaction to inflation. Goyal has pointed out that while the Fed may have its own reasons, the RBI must wait for the impact of the rate hikes till now to trickle down to the end users. That is when the inflation impact would be seen. According to Goyal, if the RBI now goes slow on rate hikes, it would be a signal to the market that inflation had started tapering. That would be a very strong signal and would do the job. In fact, even in the current meeting, Goyal had called for a 35 bps rate hike instead of 50 bps rate hike to avoid growth damage.

If Goyal had her argument, even Jayant Varma wants the RBI to wait and watch for now. Remember, Varma has been a votary of aggressive rate hikes by the RBI in this case. Varma’s view is that since the RBI had already hiked rates from 4% to 5.90% since May 2022, the RBI should ideally call a temporary halt around the 6% repo rate mark (we are almost there). That would give time for all the hawkishness of last few months to show its impact on retail inflation. An important point made by Varma was that it is a bad idea to push the repo rate much beyond the neutral rate when growth was already so fragile. He also cautioned that what works in the US may not entirely work in India.

Interestingly, while Goyal and Varma have been a lot more emphatic about the growth engine, even other members like Rajiv Ranjan and Michael Patra have expressed concerns that growth was falling while inflation was not coming down. That is a situation that the RBI was not prepared for, not had it bargained for such a conundrum. Das has been measured in the sense that India should focus on variables that RBI can control. The one important takeaway from the minutes is that RBI may be close to a temporary peak on rates. For now, the mandate is to boost exports so growth and the rupee value can be repaired.