RBI MPC minutes hint at longer inflation battle

The broad message

The monetary policy announced by the RBI Monetary Policy Committee (MPC) on 07th December had hiked repo rates by 35 bps to 6.25%. The practice is to publish the detailed minutes of the MPC meeting with the granular deliberations of the six committee members, exactly 2 weeks after the conclusion of the MPC meeting. The broad message is still ambivalent. Here is what the 6 MPC members said.
 

1. Shashank Bhide wants to stay focused on inflation 

Shashank Bhide underlined that the latest macros indicate that while GDP growth was holding up, inflation was showing a tapering trend. The fall in WPI inflation was a lot sharper as compared to CPI inflation. That is indicative that the lead indicators are pointing to a fall in inflation, but that is yet to manifest itself in the form of lower retail inflation. Bhide also pointed out that inflation expectations in November had tapered compared to September. 

In the latest MPC meet, Bhide had voted in favour of a 35 bps rate hike and gradual withdrawal of accommodation. Bhide was of the view that controlling inflation was not just about managing price expectations, but also about improving the real rate of growth. He favoured a relatively less hawkish stance to continue till inflation was decisively in control. Since boosting GDP by 2% was impractical, a better way would be to boost real GDP by reducing the inflation levels. 

2. Ashima Goyal worries about inflation above tolerance limit 

Ashima Goyal drew attention of the MPC to the fact that even the US had toned down its hawkishness. Hence toned down hawkishness by the RBI was largely in sync with the global thinking. Goyal has pointed to the fact that despite headline inflation falling below 6%, core inflation was still hovering around the 6%  mark. Also, the average full year inflation was still well above the 6% mark, so inflation control had to be a priority. 

Goyal voted for a 35 bps rate hike but was sceptical about the statement on withdrawal of accommodation. Here view was that since liquidity had contracted substantially in the financial markets and the call money rates had exceeded the repo rate, it was time to move towards a more neutral stance. She specifically underlined that it was time to reverse the credit drought since company balance sheets were substantially deleveraged and lending was now largely risk-based.

3. Jayanth Varma concerned about aggressive oil price assumptions 

Jayanth Varma has been a votary of calling a halt to rate hikes over the last 2 MPC meets and had been one of the voices of dissent to the idea of raising rates. His main contention is that the inflation projections of the RBI were based on the assumption of Brent crude at $100/bbl. However, that was not practical at a time when global demand was shrinking and a number of developed economies were on the throes of recession. Varma was of the view that the 35 bps rate hike was not warranted at this juncture and the focus must be on boosting growth rather than on controlling inflation.

Varma has specifically pointed to the growth related concerns. The GDP growth in Q2 may have been positive but that was led by agriculture and select services. Manufacturing was still in the negative and that is not a good sign. It is manufacturing that needed more credit and that was not possible if a high interest policy was maintained. The last quarter had seen interest costs shoot up and the interest coverage fall sharply for Indian companies. He was also concerned that money market rates had risen 290-300 bps in 2022, which had made funds substantially dearer. Varma felt that liquidity tightening was a major risk. 

4. Rajiv Ranjan suggests taking the foot off the accelerator 

According to Rajiv Ranjan, India cannot afford to be sanguine about inflation for two reasons. 

Firstly, core inflation was still around the 6% mark, and that is the stickier part. Secondly, even as yoy inflation is coming under control, the high frequency MOM inflation was moving up sharply. That was indicative of short term pressures. Hence Rajiv Ranjan voted for a 35 bps rate hike, hinting that this was already relatively dovish compared to the 30th September meet. 
Rajiv Ranjan also underlined that the whole world could possibly sing more of a growth tune in 2023 and then it would be a logical shift for the RBI and the MPC too. For now, he feels it is too early to relent on the battle against inflation.

5. Michael Patra feels lower inflation could be transient 

Patra has underlined that monetary policy cannot ignore the fact that the fall in inflation could be transient. Hence, the RBI must be able to respond appropriately in terms of managing the situation and also the expectations. That is the reason, Patra also voted for a 35 bps rate hike and gradual withdrawal of accommodation. He feels that any latitude on liquidity at this juncture could undo the advantage in the form of lower inflation. He remained apprehensive that inflation could stay above target for next 12 months, which could have an impact of heightening inflation expectations.

6. RBI Governor focuses on the need to be nimble 

The RBI governor, Shaktikanta Das, has reminded the markets that at this juncture India cannot afford the risk of relaxing on its inflation battle. He feels reduction in the quantum of rate hike from 50 bps to 35 bps is signal that inflation outlook was improving. However, in a world full of macro headwinds, the best bet to improve real GDP growth was to control inflation. He terms any premature pause in hawkish as a possible policy error.

While the MPC members have not given any indication of the terminal rates of interest, what one can surmise from the MPC discussions is that 6.75% could be an indicative terminal rate, which would still be 160 bps above the pre-COVID rate. The moral of the story is that a moderately hawkish central bank stance stays for now.