9 mins read . 26 Jun 2023
On June 22, 2023 the RBI announced the minutes of the Monetary Policy Committee. As is the norm, it was announced exactly 14 days after the Monetary Policy announced by the MPC on June 08, 2023. Back in early June when the policy was announced, it was largely along expected and had maintained status quo on repo rates at 6.5%. The RBI had already hiked the rates from 4.0% to 6.5% between May 2022 and February 2023.
Subsequently, the RBI had paused in April 2023 and had once again paused in June 2023. The decision was unanimous with all the six members of the MPC voting to hold rates at 6.5% in June. However, the vote on the monetary stance was not unanimous with Jayanth Varma dissenting on keeping the monetary stance as a withdrawal of accommodation. He felt that this type of monetary stance was not in sync with the economic reality.
There were a number of reasons why the RBI had decided to maintain the status quo on rates in the June policy. Firstly, inflation control was the primary objective of the RBI and that had come down sharply to 4.25% for the month of May 2023. Now, India's consumer inflation is just 25 bps away from the long-term RBI target, whereas in the US consumer inflation is still a good 200 basis points away from the target of 2%. Also, the RBI is reconciled to the fact that the impact of the rate hikes on inflation would be gradual and stretched.
The third reason why the RBI decided to hold rates was that the Indian industry had some major reservations about rising rates since it was pushing up the cost of funds of Indian corporates. That impact was evident in falling net margins and worsening solvency ratios. Above all, the RBI was also convinced that the real rates (net of inflation) were already above 1.5% and hence any threat of risk-off flows from Indian debt was non-existent now.
Why do we say that the dichotomies are widening within the MPC? Remember, the vote is quite often a compromise decision in the larger interest of arriving at a decision. However, the minutes put out the discussions in detail and that made it evident that dichotomies are widening. Here are a few cases where dichotomies are widening within the MPC.
The moral of the story is that despite the consensus on paper, the divergence of opinion is widening rapidly. Even within the consensus, there appear to be a lot of strong differences in opinion.
Here we shall look at the views of the five members of the MPC other than the RBI governor. The governor is normally called upon to vote only if there is a tie on votes and otherwise he is not obliged to cast a vote. Here is what the five other members said.
Finally, the view of the RBI governor always is like a last word. He again spoke about the importance of managing inflation expectations. Like Jerome Powell of the Fed, even Das admits he is in a zone of uncertainty. An important point was to be proactive in the fight against inflation rather than reactive. After all, durable inflation of around 4% was the key.
Content Source: RBI Website
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