Breaking up the MPC debate and why it is important…

The minutes of the first Monetary Policy Committee (MPC) are both insightful and instructive. It not only gives an insight into the thinking of the 6 members of the MPC but also can throw up interesting trends on the thinking of the individual members. The government and the RBI need to be lauded for the concept of an MPC which will bring in a lot more transparency in the way the entire monetary debate has taken place in India. Here is a member-wise account of the debate ahead of the rate cut decision this month.

View of Dr. Chetan Ghate (MPC Member 1)…

Dr. Ghate’s view on the Indian economy was focused on the need to nurture the green-shoots that were visible in select sectors of the economy. According to Dr. Ghate, the weak capacity utilization in the corporate sector means that there could be upside risks to inflation. However, according to Dr. Ghate, the rate cut proposal was a risk worth taking in the light of the positive externalities that it will have for the overall economy. Dr. Ghate voted emphatically for a 25 basis points cut in the repo rate.

View of Dr. Pami Dua (MPC Member 2)…

Dr. Dua focused more on inflation expectations. For rate setting what is more critical than historic inflation, is broad inflation expectations. As per RBI data put out, there has been a significant reduction in expected inflation which could be a key driver for lower rates. Dr. Dua was also emphatic that there was a risk of input price increases in some sectors but that was not likely to translate into higher selling prices due to stiff competition at the consumer end. Dr. Dua also voted for a 25 basis points cut in the repo rate.

View of Dr. Ravindra Dholakia (MPC Member 3)…

Dr. Dholakia focused more on the perceived upside risks to inflation as a result of the OROP payouts to the armed forces and the 7th Central Pay Commission payouts to the government servants. According to Dr. Dholakia while an upside risk to inflation may be theoretically correct, in the final analysis it was more likely to be statistical in nature and not a real risk. He believes that the chances of inflation weakening due to good monsoons is much higher as the higher liquidity is likely to get absorbed easily in the current market condition. Dr. Dholakia also focused on the need to spur growth via a monetary stimulus. Dr. Dholakia voted for a 25 basis points cut in the repo rate.

View of Dr. Michael Patra (MPC Member 4)…

Dr. Patra focused more on the loss of momentum of inflation being the key theme of monetary policy. While the beast of inflation may not have been arrested, the underlying trend of food inflation seems to have turned around and acquired a downward trajectory. Dr. Patra also focused on the paradox in the Indian economy where a few sectors like public investments, portfolio investments, steel and agriculture were picking up while scores of other sectors were languishing. The only solution to address this paradox according to Dr. Patra is by providing a monetary stimulus to the economy. Dr. Patra also voted for a 25 basis points cut in the repo rates.

View of Mr. R Gandhi (MPC Member 5)

The views of Mr. Gandhi acquire significance as he as an RBI insider and has the best ringside view of the Indian monetary system over the past few years as its Deputy Governor. Mr. Gandhi has focused very specifically on the reduced risk to food inflation as a result of the tempering of prices of pulses. Remember, pulses have been the biggest contributor to food inflation in the last few months. Mr. Gandhi has pointed towards the likely spurt of 57% in pulses production as per initial Kharif estimates. That will push the food inflation trajectory down. Mr. Gandhi also voted for a 25 basis points cut in the repo rates.

Views of Dr. Urjit Patel (MPC Member 6)…

 Dr. Patel, the governor of the RBI, has highlighted the need to draw a fine line of distinction between model based projections and calibrated judgement at the ground level. According to the high frequency data-based models deployed by the RBI, there were clear upside risks to inflation. However, as Dr. Patel highlighted, the decision in the current scenario was driven more by the pragmatic reality of slow growth and the need to un-choke economic activity through monetary support.

In a nutshell, the bias towards a repo rate cut was almost unanimous in the October MPC meet. This holds the promise of another rate cut before the end of the current fiscal year. Of course, as Dr. Patel has highlighted, inflation will have to be watched. But the trend of these discussions over the next 6 months is likely to throw up some interesting insights into how the winds of monetary policy making are shifting.

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