The Reserve Bank of India on Tuesday released the minutes of the first monetary policy committee (MPC) meet.
The six-member MPC, headed by new RBI governor Urjit Patel, unanimously voted for a 25 basis point cut in RBI’s key lending rate—the repo rate—to 6.25 percent, arguing that large underutilised capacities and good summer rains will likely keep inflation low in the near future.
To discuss the minutes in detail and the key takeaways, CNBC-TV18 spoke to experts and economists - Siddhartha Sanyal, Chief India Economist, Barclays, Shubhada Rao, Chief Economist, Yes Bank, A Prasanna, Chief Economist, ICICI Securities, Pronab Sen, Former Adviser, Planning Commission,Dharmakirti Joshi, Sr. Director, CRISIL,Jayesh Mehta, MD, BofAML
The six-members of the MPC are the RBI governor Urjit patel, RBI Deputy Governor R Gandhi and Executive Director Michael Debabrata Patra are the nominees of the Central Bank and the government nominees on the Committee are Chetan Ghate (Professor, Indian Statistical Institute), Pami Dua (Director, Delhi School of Economics), and Ravindra H Dholakia, (Professor, Indian Institute of Management, Ahmedabad).
Below is the verbatim transcript of that discussion with Latha Venkatesh on CNBC-TV18.
Q: Can you detect further dovishness or not so much?
Sen: The impression I get is that they were taking a call simply on two things which is their reading of what was the likely trajectory on inflation and output gap.
It surprises me that they didn’t reflect on the other dimensions that go into the way one conducts monetary policy. There is some reflection on the global economy but not on issues like what is happening to the banking sector, what is the play in the rest of the financial sector.
I don't think there is any big disagreement between the members of the MPC and most of the economists in the country, which is that inflation is going to moderate at least for the next quarter and possibly a little more than that. Then after that there maybe an uptick but how strong that uptick is nobody has really been able to project.
However as far as the output gap is concerned I have always been puzzled as to what is the data set that is used to measure output gap. I suspect that most of them are doing it essentially based on the rate of investment and therefore consequently deriving what they believe to be the capacity of the economy. However that is not necessarily the right thing to do at all times. So, if you have investment which is going in to not to expand capacity but to modernise, to improve technology, lower costs, that is not going to widen your potential capacity.
I suspect that there is a certain degree of over estimation of the output gap.
Q: Your first thoughts what would be your key takeaways?
Rao: I think 6-0 debut was quite clearly a pronouncement of dovish take by most of the members and from what you read out in terms of the commentary by all the members, I will say barring one or two who did have concerns on this lower trajectory of inflation being of only in the near- term and going forward we need to be more vigilant - that tells you that probably there are some concerns for going forward inflation trajectory, by at least couple of members that I could assess from the reading, but in our own assessment we believe that currently we are seeing is only a near term downturn and nobody knows how the output gap is going to close up very quickly and that would have its impact on the concern elucidated by the stickiness of core.
Q: Your key takeaways?
Prasanna: I think you kind of pointed out, there seems to be some dichotomy between the members who belong to RBI and the external members. RBI members clearly are worried about some upside risks whereas the external members are more sanguine. The common aspect is all the members have sighted big growth prospects particularly on the investment side. I think they have sighted either capacity utilisation or output gap which seems to be an element of commonality across all the members.
The third is a surprising part like you pointed out; there is no mention of any real rate. Also there is no mention of any forward looking inflation estimates also.
Q: Your takeaways?
Sanyal: Well, I am not too surprised that there is no mention of immediate target of 4 percent. I think for RBI at the moment it’s a real long-term target, which they will not be too adamant of reaching right now. At this moment if they can contain inflation within the 4 percent plus-minus 2 percent range effectively if they can contain inflation within 4-6 percent kind of a range they will be reasonably happy.
They possibly don’t want to get themselves too pegged to a real interest target also, because earlier also we have seen in the previous regime at some of time RBI mentioned about 1.5-2 percent target then kind of soften their stance, because in the previous regime also if you see real interest rate not really always being 1.5-2 percent range, occasionally it had been much lower and at some point of time RBI reintroduced concepts like real 3 month treasury bill rate or some of the other rates not all the real repo rate so to say.
Q: Your key takeaways just from the statement. Do you glean anything in terms of forward looking statements or attitude of the MPC members?
Sanyal: I will just try to flag two points; at this moment all the members seem to be reasonably accommodative in terms of their stance, so it will be difficult for them to change that particular stance quickly, so we will definitely factor in one more rate cut over the course of the next few months.
Having said that, if you see as Prasanna also mentioned that if you see the comments particularly from the RBI officials they want to stay guarded about the possibility of an uptick in Q4 of the financial year that is Q1 2017 - that will play a crucial role, if there is not too much of a threat, we will definitely see room for one more rate cut by early 2017.
Q: What are you able to smell from this with respect to December or thereafter?
Joshi: It is hard to predict December but looks like as of now if the inflation trajectory continues to be downwards I think there could be a possibility of another rate cut though it is not hinted at all in the minutes.
I think what came out of this minutes was that there was a general consensus on rate cut but some of the members, even outside members they were a bit cautious talking about stickiness of core inflation. I think that was one of the concerns which one member raised. Apart from that the central banks stance was more or less clear from the monetary policy where they had said that the upside risk to inflation remains but they have come down compared to the past. So, there is a caution from the central banks side on inflation. So, my sense is it will be more data driven and we will have to see how the data plays out over the next couple of months.
Q: What will you guess as the next step?
Rao: I think the first point that I gleaned through is most of the members seem to be dovish in the near term. Couple of RBI members are putting an upside risk to the last quarter but largely including Chetan Ghate, he seems to be saying that structurally and cyclically there seems to be an abatement. Now that tells me that it will go beyond just the two quarters.
To me a large part of the committee membership tells you that they are dovish as far as the current fiscal is concerned. The opinion remains divided. In fact there is not much of a view going forward for the next fiscal year. Perhaps I was anticipating much more in terms of each members estimation of growth and inflation. So, how does each member see the trajectory going forward, whether it is going to be demand fueled inflation which will reverse the current momentum and trajectory, I think on that aspect perhaps the committee is not as vocal as one would have anticipated.
Q: Any further comments, can you glean from their leanings as reflected in the statement, how much space there is to cut in their estimate?
Sen: I don’t want to be cynical about this, but the sense I am getting is that this particular MPC statement is essentially to allay fears about hawkishness. I don’t think the MPC really got down to business in this weekend. The next MPC which will really tell us what their thinking is and I think this was just a positioning.
Q: Can you smell one more cut, anymore cuts or there is nothing in the statement that gives you that comfort?
Prasanna: From the statement I don’t think you can kind of gather too much, they haven’t spoke on forward looking expectations, but in any case if actual data is undershooting the fan chart which was put out in the statement that tells you that those upside risks won’t materialise - - definitely that does give rise to an opportunity to cut, but in any case also if you look at the tone of comments by the external members at least is definitely leaning on the dovish side, in that sense I think like somebody else pointed out it would be very difficult for them to kind of turnaround in the next meeting and say they don’t want to cut maybe not in the next meeting or the meeting after that, but definitely we are looking at one more cut.
Q: Any further takeaways do you detect more dovish committee than you assumed or do you think this is a very balanced statement that you have got from all the members?
Joshi: I would like to say that this is another step towards modernisation of central banking and the process is more participative and more transparent as I think people have mentioned it. Now going ahead I think the committee will mature as we go along. As of now it is difficult to read anything for the next policy from here.
Q: What are your key takeaways as a bond expert or as a bond trader?
Mehta: It is more or less inline with expectations in the policy itself. If you look at most of the comments by each of the MPC members, you can come out with three themes which is slightly different. One, they have looked at, your food inflation is down because of various effort on the supply side management and even your pulses are very much down. That is one of the big risks taken off.
Second is of course capacity utilisation is much lower and they have taken the pragmatic view that the basic concern we have is food inflation and little bit on the education and services side but the major problem was food inflation. Now that coming down dramatically and capacity utilisation not being too high, it seems as long as the food management is done well the inflation should remain in check, that is the way I would look at it.
Of course they have taken view on the global fragility also. So, there would be one more room before March.
Q: If you solely looked at the statement, tomorrow how would you trade? Would you think the market will factor in because of these statements further dovishness?
Mehta: Not really. If you look at it most of the guys had taken the same view even when the policy came. I think food being the critical thing and that is being done and I think we have taken a pragmatic view that supply side management which has controlled the food dramatically, if that remains good with the good monsoon then there could be - unless global shocks happen.
Q: So, tomorrow no extra reason to go long bond?
Mehta: No extra reason. The same reason continues to go long bonds.
For the entire discussion, watch video