MPC minutes

There seems to be unanimity over monetary dovishness…

What is unique about the recently constituted Monetary Policy Committee (MPC) is that the detailed minutes of the MPC will be made public exactly 14 days after the policy announcement. This is a great step towards transparency. The minutes do not just capture the gist of the discussions, but also presents the views of each of the 6 MPC members with their arguments and their monetary stance. This gives a clear and more lucid idea of how the monetary tone is shifting within the MPC. In the first MPC meet, there was total unanimity on the need to cut repo rates by 25 bps.

Inflation expectations benign…

 One of the key takeaways from the MPC minutes is that all the MPC members are tilting towards benign inflation expectations. This is largely due to better control over food inflation and a reduction in supply side shocks. All the MPC members were confident of the Indian economy moving towards 5% sustainable inflation over the next 1 year and an eventual target of 4%. On the concern over a likely demand-pull inflation due to the payouts under OROP and 7CPC, the analysis is pithier. The members expect that the impact of the OROP and 7CPC payouts will be more statistical than anything real.

Interest rates southward…

 The virtual consensus on the rate cut stemmed from the confidence over the sustainability of low inflation in the Indian economy. There was a unanimous decision in the MPC to cut the rates by at least 25 basis points. This needs to be looked in the light of growth performance in India and the global markets. India has been consistently reporting weak IIP numbers and it has been in negative territory in 3 out of the last 4 months. A rate cut was, therefore, justified to give a push to domestic output. Even in the global context, India needs to maintain its 100 bps GDP growth gap with China and a rate cut will spur that.

What Dr. Urjit Patel says…?

Among the MPC committee members, the RBI governor Dr. Patel made some pertinent observations. He was confident of low inflation as pricing power continues to elude producers in most sectors making it difficult to be hawkish on inflation. Dr. Patel’s statement also reveals the precedence of pragmatic judgment over data and models. For example, while models did indicate upside risks to inflation, the MPC decided to go ahead with a rate cut as it was more pragmatic. Lastly, Dr. Patel has focused more on the subdued economic outlook as a driver of repo rates than inflation as inflation is more model-driven and growth is more pragmatism driven. This also opens the door for another rate cut before the end of the fiscal, once the scenario in the US becomes clearer by December! ©

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